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Lender wants to pay the upfront LPMI to beat another lender that doesnt' require LPMI due to former lender's low appraisal?

by vturnip563 from San Jose, California. Jun 28th 2014 Reply


Richard Kelly (Richard Kelly)
#138 ranked lender in California - 10 contributions

If there is upfront PMI is there also annual PMI you would have to pay? Is this an FHA loan?A little more information would be helpful. What is the loan amount and what was the appraised value? Your address would be helpful too just to cross-check the appraised value.

Jun 28th 2014
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This is a conventional loan for 527k. Lender A appraised early at 625k (before a house close by sold for 688k), lender B appraised for 685k after the house near by sold.Lender B offered to finance 530k @ 4.25%.Lender A, wanting to beat that, but stuck with their appraisal, offed to finance 527k @ 4.25% (APR), but claimed they are required to include LPMI. They told me they would do an up front payout and would eat the costs. I'm wondering if that's normal, and what that would mean for the loan should I want to refinance in the future. Based on the closing docs I got I see no fee for up front PMI and the APR is 4.25% - same as the rate.Thanks for your time, Richard.

Jun 28th 2014
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I should also point out that both/all loans offered are 30 year fixed.

Jun 28th 2014
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Richard Kelly (Richard Kelly)
#138 ranked lender in California - 10 contributions

It sounds like Lender A is offering you an FHA loan, in which case you will be obligated to pay Annual PMI for at least five years or until you refinance again. Based on what I know stick with Lender B.

Jun 28th 2014
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The loan documents say this is a Conventional loan, not an FHA loan.

Jun 28th 2014
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Richard Kelly (Richard Kelly)
#138 ranked lender in California - 10 contributions

One more point: at a value of $685,000 your loan-to-value with a $530,000 loan is 77%. You don't need mortgage insurance and there is no possible way, in my opinion, that a loan with mortgage insurance can be a better deal for you. btw, it is common for lenders/brokers in the Bay Area to set the interest rate at point which the rebate to you for the higher interest rate covers all or most of the one-time fees, including the upfront MI. And that is usually the deal that makes the most sense for the consumer--in the Bay Area where property values are so high. The thing to keep in mind is that the rebate is to the consumer, not the lender/broker--the lender's/broker's compensation cannot change based on interest rate; any rebate in excess of their compensation goes to the borrower--you. So, in reality you are paying the up-front MI, not the lender, by agreeing to higher interest rate with a higher rebate. Complicated isn't it? At the end of the day the borrower pays all of the fees either up-front or over time by accepting a higher interest rate. Given that the rate for a nice rebate is higher usually by only 1/8 or 1/4 of a point and the fees are so high it most often makes sense to take the higher rate and get the rebate to cover closing costs.

Jun 28th 2014
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But I didn't agree to a higher interest rate, they are offering the same 4.25% that Lender B is offering, and the APR is 4.25% also. Otherwise I would agree that I'd be effectively paying for this via the rebate as you mentioned.

Jun 28th 2014
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Richard Kelly (Richard Kelly)
#138 ranked lender in California - 10 contributions

If it's conventional, I don't see how Lender A can pay the up-front mortgage insurance unless you are paying them an origination fee which is a little odd with a loan that size. Do mind sharing the balance on your current mortgage?

Jun 28th 2014
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Richard Kelly (Richard Kelly)
#138 ranked lender in California - 10 contributions

A rate higher than par is what you've agreed to--sorry, I was not as specific as I should have been. I wasn't comparing one lender's rate to another's, just par. Example: one lender I work with offers 4.0% at par today for a 30 day lock. That means you don't pay any points and you don't get any rebate. You pay all the fees up-front, out of pocket or via a loan amount higher than your current balance. At 4.25% this lender offers a rebate of 1.625% which is a bit more than enough to cover single premium mortgage insurance--the quote I got from MGIC is for $7325.30. The devil is always in the details. If you want to give me a call Saturday my number is 650-387-1237. I'm not going to try to take any business from either Lender A or Lender B; I'll just be a neutral party and try to help you out.

Jun 28th 2014
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Thanks, Richard.The amount we owe is 380,078.09 on the first and 143,274.40 on the second (so 523352.49 total)The new loan would be for 527k, and the lender is offering $3394.52 total in credits. There is an origination charge of $1049.00, and the points for the rate shown is $0.In the "L Settlement Charges" sheet offered, it shows $0 for mortgage insurance and the total settlement charges is $7,365.16 (which includes $4.3k in escrow).Doing the math I see:settlement charges - lender credit - good faith deposit + current principal + cash after closing = new loan amount:7365.16 - 3394.52 - 500.00 + 176.87 + 523,352.49 = 527,000.00I just asked the lender to clarify and they mentioned that the LTV is at 81% and that they are paying the LPMI in full to match the rate of another lender, FWIW, I don't see any PMI on the HUD.

Jun 28th 2014
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Bert Carpenter (BertCarpenter)
#38 ranked lender in Arizona - 1,821 contributions

It doesn't matter what anyone is telling you, DO NOT go with the first lender. Because the appraised value with the second lender results is a 77 Loan-to-Value, there will never be any MI required now or in the future, Up BPMI or LPMI. If the rate is the same, then the deal from the second lender is the better deal. No worries, no surprises. If Lender A is not willing to re-appraise, then in my opinion, their deal, no matter how sweet they try to sell it, is just plain sour. Call Lender B and close the deal. ~ Bert Carpenter, The LoansA2z team of NOVA Home Loans ~ NMLS 40586 ~ Licensed in California and Arizona and Washington ~ www.LoansA2z.com ~ 888-889-9950

Jun 28th 2014
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Sean Young (SeanYoung)
#2 ranked lender in Colorado - 1,112 contributions

I would agree with Bert. 2nd lender all the way.

Jun 29th 2014
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Thanks for the guidance, everyone.The reason I was debating this at all is that going with the second lender would result in final closing costs of 1.5k.I guess it would be nice to have more information about the terms of the MI WRT the loan. All the research I've done online about mortgage insurance talks about PMI (which is $0 on the loan), increased % rate (which is the same rate every other broker has given me when MI was not required), and/or a lump sum (which the lender is paying). Since none of that seems to apply for the loan offered, I'm still in the dark about what the "gotcha" might be everyone seems to be warning against. Does LPMI change based on LTV over the life of the loan? Can terms change that would create/shift a burden to the borrower?

Jun 29th 2014
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Richard Kelly (Richard Kelly)
#138 ranked lender in California - 10 contributions

There is another question you need to be asking yourself. What if you kept the loan at the current balance of $523,000 but moved the rate to 4.375% with Lender B. Ask Lender B what the rebate will be in this scenario and then do a rough calculation of your break-even point. Your payment on $530K at 4.25% is $2,607.28. On $527K at 4.375% it is $2,631.23 so roughly $24 higher. On Friday the rebate on a loan with no impound account for taxes and insurance from one popular lender that is very competitive was 1.625% of the loan amount at 4.25% and 2.25% at 4.375%. So at 4.25% you get a rebate of $8,612.50 and at 4.375% you get a rebate of $11,857.50 plus your loan amount is $7,000 less. Which do you think is the better deal? (All the fees and costs are about the same in both cases.) In this case, dropping the rate from 4.375% to 4.25% costs you $7,000 in principal and $3,245 in rebate. Just considering the rebate, the rough break even point using the $24 incremental cost is 135 months by my reckoning. (It's a rough estimate because we aren't considering all the factors like tax implications, opportunity cost of money, etc. but it's good enough to give you an idea of the trade-offs at different rates. And remember, we haven't even factored the lost $7,000 of principal into the equation.) Frankly neither deal sounds great but Lender B is still the first choice. Something with Lender A is not adding up but then none of us responding know all of the details--there are other questions but this is a difficult way to gather all the info; one question tends to lead to another until finally it's possible to visualize the entire scenario.I am assuming the 2nd mortgage is one you got when you bought the house.

Jun 29th 2014
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Richard Kelly (Richard Kelly)
#138 ranked lender in California - 10 contributions

Oops, used $527K for some calcs by mistake. On a loan amount of $523,000 the payment at 4.375% is $2,611.26 while the payment on $530,000 is, as stated, $2,607.28. So the difference is only $4.0. At least with the lender I'm talking about you are clearly better off at 4.375 on $523,00 than at 4.2% and $530,000.

Jun 29th 2014
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Thanks again, Richard.The second mortgage was indeed part of the original home purchase. The rate I mentioned here was locked a little while ago when they were higher it seems. Your guidance makes sense, though, thanks for all the help to you and the others!

Jun 30th 2014
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