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].