Wednesday, December 24, 2014 - Article by: Bert Carpenter - Certified Mortgage Consultant, NAMB Nova Home Loans -
One of the things that drive me crazy in our industry is the concept of Lender paid Mortgage Insurance. Lenders don't pay for the Mortgage Insurance, the borrower does. The fact is Lenders, including Mortgage Brokers, Mortgage Bankers and even the big Commercial Banks really don't pay for anything. You, the consumer pay for it all. The question is how. Simply stated, when a borrower agrees to accept a higher rate than the current market, the loan generates a credit that can be used for costs relating to the mortgage loan. Think of this as the opposite of Buying Down the Rate. The investor that is purchasing the loan from the originating company actually pays the originator for the above market interest rate. This is the money that is then used by the lender to 'Pay' for your mortgage insurance premium. Depending on your plans, lender paid mortgage insurance could work in your favor, but for many it actually can be very expensive.
Example. A $200,000 purchase transaction at 95% Loan-to-value with a 720 mid score borrower. The monthly PMI premium they will pay would be about $103.33. To do the same transaction using 'Lender Paid PMI', the interest rate would need to be jacked up 0.375% in order to provide enough money for the lender to pay for the $4,460 up-front PMI. This would increase your monthly payment $44.68 per month. On the surface, it appears that the Lender paid PMI will save you $58.65 per month, but here is what you need to consider and why one option may be better than the other. At the higher rate, you have the higher payment for the LIFE OF THE LOAN. In other words, you are paying for the PMI forever. However, if you opt for the borrower paid monthly PMI, in the beginning your loan payment including the monthly PMI of $103.33 would be $58.65 higher than the Lender paid option, BUT...If your home is in an area with even a modest 3% annual appreciation rate, you would be able to cancel your PMI in as little as 46 months. And from that point on, your payment would be $44.68 lower for the remainder of the loan.
So what's the take away from this? If your plans are to be in the home or in the loan for more than five years, you should look at Lender paid PMI very skeptically. If on the other hand, your plans are more short term, then lender paid PMI can actually save you money. Just remember, there is no free lunch. You are the one paying for it all, the question is how?
Bert Carpenter, The LoansA2z team of NOVA Home Loans ~ NMLS 40586 ~ Licensed in Arizona (AZLO0911876 / AZBK0902429), Washington (WALO40586 / WACL3087) and California (CADOC40586 / CAFLL6036566). We are licensed by the CA-DBO under the CFLL and CRMLA. Loans made or arranged pursuant to CFLL or CRMLA license. ~ www.LoansA2z.com ~ 888-889-9950
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