Private Mortgage insurance is insurance that covers a Lender “Bank” incase a borrower defaults on their loan. A bank will only lend up to 80% of the value of a property. This is why you hear that the standard is 20% down payment. If you have less than 20% down payment then you can still purchase a property but you will need to get some form of mortgage insurance. This mortgage insurance is an added cost to you and is usually more expensive the less down payment you have.
Monthly Mortgage Insurance vs. Lender-paid Mortgage Insurance (LPMI)
Every lender or mortgage broker will have different options when it comes to mortgage insurance. Two of the most common forms are a monthly mortgage insurance option and a lender-paid mortgage insurance option.
Monthly Mortgage Insurance
The monthly option is an extra monthly payment specifically for insurance that is paid on top of your mortgage. This payment will depend on your loan amount as well as the amount of down payment. Typically this option is more expensive initially than the lender paid option. The good thing about this option is once your loan amount gets to 78% of the value of your home then the monthly mortgage insurance payment goes away. This means that your payment now becomes less expensive than the lender paid option.
This option is good if you have closer to 20% down payment or if you plan on keeping the property long term. Monthly Mortgage insurance premiums may be deductible. (Please consult with your loan originator and/or CPA for advice)
Lender Paid Mortgage Insurance (LMPI)
Lender Paid Mortgage Insurance or “LPMI” is a second type of mortgage insurance that some lenders may offer. The cost of the insurance is usually rolled into an adjustment in your interest rate. Depending on the amount of down payment this adjustment will be higher or lower (+.125% – +.625%). There is no extra monthly payment but this adjustment will cause your mortgage payment to increase. Typically this option is less expensive than the monthly option at the beginning of your loan but the interest rate does not change. This means that at the point when your loan amount reaches 78% of the value of your property, the LPMI option becomes more expensive than the monthly option.
This option may be beneficial if you have a lower down payment (5%-10%) and you want to save money in the beginning. It may also be beneficial if you are not sure how long you will keep the property and may not see a benefit from the monthly mortgage insurance going away when your loan amount reaches 78% of the value. Unlike the monthly mortgage insurance option where the mortgage insurance is not tax deductible, the LPMI option increases the interest rate. Although this means that your payment and interest will be higher, your mortgage interest can be a tax deduction. (Please consult your loan originator and/or CPA for advice)
* It is best to consult with you mortgage loan originator about Private Mortgage Insurance. Not every lender offers LPMI as an option to their borrowers. Monthly Mortgage Insurance rates may vary as well.