Making the case for mortgage insuranceJoe Amorosomortgage insurance, lender-paid, insurance premiums, small down payments
Chances are your customers have read all of the books, Web sites
and financial advice columns. After doing their homework, they may
have a decent idea of the exact mortgage program that will move
them into their dream home. At the very least, they know one thing:
avoid private mortgage insurance (PMI) like the plague. Mortgage
insurance can be expensive, and it is never tax deductible.
But when does it make sense to include mortgage insurance on
your loans? The short answer: when it's paid by the lender.
Lender-paid mortgage insurance (LPMI) provides a tax deductible way
for homebuyers to finance up to 100 percent of the purchase price
without having to carry PMI or pay the higher interest rates of a
second mortgage.
Benefits to borrowers and brokers
LPMI allows borrowers to finance up to 100 percent of the value of
their home with a single first lien. And instead of paying a
monthly premium for mortgage insurance, the cost of LPMI is built
into the interest rate on the loan. It allows borrowers who choose
this option to receive a higher tax deduction for about the same
monthly payment. Remember, borrower-paid monthly mortgage insurance
premiums can be expensive and they are not tax deductible.
LPMI often gives borrowers a lower overall rate than the blended
rate of a first and second mortgage. In the piggyback structure of
an 80/20 financing scenario, the rate on the second mortgage could
be three-five percent higher than the rate on the first
mortgage.
For brokers, LPMI is a seamless solution. It makes it easier to
qualify borrowers, reducing the paperwork and effort to process a
second loan. At the end of the day, LPMI is another method of
assembling loans to help brokers grow their business.
Loan programs that offer LPMI as an
option
LPMI is available for many loan programs, from conventional to
alt-A. As with most loan programs, borrowers can still choose to
have an adjustable-rate, fixed-rate, amortizing or interest-only
payment. In addition, borrowers can use LPMI in conjunction with
certain loan programs for owner-occupied residences, second homes
and investment properties.
The LPMI borrower
Borrowers who are interested in LPMI fit into a general profile:
They prefer to have a small down payment or none at all, and they
are averse to the risk of potential rate increases to which they
are often exposed on a second mortgage. Also, they must have a
positive credit history.
Advantages of LPMI versus second
mortgages
The interest rate on many second mortgages is adjustable, and most
economists expect these rates to increase this year. In addition,
many second mortgages have a shorter term than a first mortgage,
causing total monthly mortgage payments to be higher than they
would be in a similar scenario using LPMI.
A disadvantage of LPMI
The one clear disadvantage of LPMI is that borrowers will pay a
higher rate for it throughout the life of their loan. But
disciplined borrowers will eliminate their monthly PMI premiums
once they reach 20 percent equity in their home, and those who have
piggyback loans can accelerate repayment of their second
mortgage.
The future of PMI
Mortgage insurance companies have seen their business eroded by
80/20 and sub-prime loans where PMI is not needed. And since the
main complaint borrowers have about PMI is that there is no tax
advantage, mortgage insurers have been engaged in an ongoing and
aggressive lobbying effort to change the tax code. In short, PMI
may not have seen its last days.
A final word
Lenders are constantly looking at new ways to offer cost-effective
solutions to your borrowers who are seeking low down payment loan
programs. While LPMI may not be the silver bullet in all scenarios,
it competes head-on with piggyback loans and gives you another
serious option to sell to your customers.
Joe Amoroso is a senior vice president with Opteum Financial
Services. He may be reached by e-mail at
[email protected].
