THE BASICS OF LENDERPAID MORTGAGE

INSURANCE

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If you are purchasing a home and putting lessthan 20 percent down on it, you will be requiredto pay mortgage insurance, otherwise knownas PMI. This insurance helps the lender knowthat he is covered should you default on theloan, rather than leaving him out of luck. Loansthat have an LTV that is higher than 80% areconsidered riskier than loans with a lower LTV.The insurance, while beneficial for the lender,can be difficult for you as the borrower toafford. One way to get around this requirementis to take lender paid mortgage insurance.

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What is Lender Paid Mortgage Insurance?It might sound odd that the lender would pay you mortgageinsurance. What would prompt a lender to do so? Basically it isa way for them to still obtain your loan while not putting you ina loan that you cannot afford comfortably. By paying yourmortgage insurance for you, the lender still gets the profits thatare generated from the interest you pay on your mortgage.The tradeoff, however, is that you will have to accept a higherinterest rate in order for the lender to pay the insurance. Therate is typically .5% higher than if you were to pay theinsurance yourself. Because the insurance is paid to a thirdparty, it does not affect the lender if you they pay it rather thanyou.

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What are the Advantages to the Borrower?

There are many advantages that you, as the borrower, canrealize as a result of taking lender paid mortgage insurance.The most common benefit is the ability to get into a home withas little as 3.5% down and still not have to pay any type ofmonthly insurance fee. This means that you can get aconventional loan, which has very few fees rather than an FHAloan which requires upfront and monthly insurance fees. Inaddition, if you happen to close on your loan during a timewhen rates are exceptionally low, even taking a rate that is .5%higher will still be considered affordable and you do not havethe added cost of the mortgage insurance to worry about.

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What are the Disadvantages?As with program, there are disadvantages to lender paidmortgage insurance programs. The most obvious issue is thehigher interest rate that you will have to pay. Because everylender will differ, it pays to shop around to find the one that willpay the insurance and offer you the lowest rate. You might besurprised at how much they differ. Another disadvantage is thefact that your higher interest rate is for the life of the loan or forthe duration that you keep it. If you were to pay PMI on your own,you could cancel it once you are below 80% LTV. If you plan onstaying in the home a long time, this could be a significantsavings in the long run.

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Not every lender offers lender paid mortgageinsurance, so it will require you to shop around. Beforeyou do so, however, you should determine if it is theright choice for you. There are many other options outthere, so make sure to look at all programs and howthey affect your monthly payments as well as yourfinancial picture in the long run. There is no cut and dryright or wrong answer for everyone; you need to weighthe options for your situation to see if it makes sense tohave the lender pay your mortgage insurance for you.

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INFORMATION PROVIDED BY:

Justin McHood

Mortgage Commentator

Information Originally Published: 10/06/15

Justin McHood is Americas Mortgage Commentator and hasbeen providing Mortgage commentary for over 10 years.

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