How does lender-paid mortgage insurance work?

by 17 Jan 2017
I don't understand the mortgage insurance choice called lender-paid mortgage insurance (LPMI). What I don't understand is how a lender could pay this cost for a borrower. How does that work? And why is it an advantage over mortgage insurance paid by the borrower?

--Enrique from California

This is an excellent question which often confuses many consumers, as well as lenders and real estate professionals. In simple terms, the borrower pays a larger mortgage payment to the lender and then the lender pays the mortgage insurance premium to the mortgage insurance company. Whether the MI is paid monthly by the lender, or as a lump sum up front, the lender would charge a higher rate to include the cost of the mortgage insurance in the payment. Here is a very simple example so the concept can be understood. The example is based upon hypothetical numbers (for actual rates MGIC provides a Rate Calculator for quotes and MI option comparisons).
  • Option One: 4.00% mortgage with a 0.5% mortgage insurance premium
  • Option Two: 4.50% mortgage
What is the advantage of the lender-paid option? In a real-world analysis, the rate may be lower than the combined payment with mortgage insurance. For example, if option two above was 4.375%, then the lender-paid option would have an obvious advantage. Or, let's say the borrower's income is over $110,000 annually. This means the lender-paid option could be tax deductible, while the mortgage insurance payment may not be deductible. Always advise your clients to check with a tax professional regarding their eligibility for tax deductions.

What is the disadvantage of the lender-paid option? Borrower-paid mortgage insurance can be cancelled after a certain amount of time, based upon certain circumstances. Lender-paid mortgage insurance cannot be cancelled. Next week we will look at the "single-premium" lender-paid option. 

--Dave Hershman

Dave Hershman has been the leading author and a top speaker for the industry for decades with six books authored and hundreds of articles published. His website is www.originationpro.com. If you have a reaction to this commentary or another question you would like answered in this column? Email Dave directly at dave@hershmangroup.com.   
 

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