Part III: I am new to the industry and my mentor has indicated that my clients should never pay mortgage insurance if they can avoid it. When his clients have less than 20% to put down, he always has his clients use a second to avoid mortgage insurance. Is this good advice or is there another perspective in this regard?
--Brittany from California
We have made the point in the past two weeks about presenting all options to a client. In addition to presenting different loan programs, these options include those with mortgage insurance and those without. But the options should also include offering all MI choices. While we can't cover all MI choices in one column, we do want to present one such choice as an example which is common today. That is the choice between "lender-paid" and "borrower-paid" MI. Many times a loan officer will run the numbers and automatically pick the option which produces the lowest payment for the client. And this may be the best choice. However, let us look at another aspect of the decision.
The borrower-paid MI may be cancelable when the loan reaches a certain loan-to-value in the future. And this could happen in as little as two years under certain scenarios. The lender-paid MI is not cancelable. Lender-paid MI is often financed up-front via a yield spread premium. This "YSP" is produced through a higher interest rate. Let's say the buyer is planning a major renovation which, coupled with appreciation, would lower the loan-to-value of the loan below 75% in two years. The homeowner could then cancel the borrower paid MI, if all other conditions are met. But the homeowner could be paying on the lender-paid MI for many years longer via the higher interest rate.
On the other side of the equation, if the borrower makes over $110,000 per year, the borrower-paid MI may not be deductible, but the higher rate produced by the lender-paid MI could be deductible, if it is a primary residence or second home. Thus, just as comparing loan programs, comparing mortgage insurance alternatives are very important as well. And always be sure to advise your clients to check with their tax advisor to consider the tax implications of their choices.
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 email@example.com.