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Recently I started looking for new ways to save money that I have not thought of before, and I thought about trying to eliminate the mortgage insurance on our loan. Now mortgage insurance is often referred to as PMI if you have a conventional loan or MIP if you have an FHA. MIP and PMI are very similar except for MIP is usually lower than PMI (I have heard that recently the law has changed and MIP is actually more in several cases). The reason for that is in an FHA loan, you are required to pay a big portion of MIP upfront at the closing. Mortgage insurance is charged to home buyers that do not have at least 20% equity of their home at the time of purchase or refinance.
While I was going to college to get my degree in engineering, I worked as a mortgage loan coordinator at a big national company. My job was to take the loan from the loan officer and guide it through the entire process and be the number one contact for the customer until closing. I processed and closed many loans that had PMI or MIP and the rate of mortgage insurance that the borrower had to pay depended on several factors most importantly the borrower’s credit rating and the percent equity of the home value. Until recently, I always thought that you had to get to 80% loan to value by either paying down your mortgage, or hoping that your home’s value rises and then refinance to eliminate PMI.
My wife and I bought our home about a year and a half ago, and we put down the FHA minimum 3.5%. We currently have close to 5% equity (as long as our home’s value did not drop). In my recent article “What To Pay Off First If You Could”, I talk about looking into speaking to a loan officer about options we may have to eliminate our MIP. I finally got a chance to speak to our loan officer and before I continue I have to state that I know every situation is different, but depending on when you bought your house and your current interest rate this may be a very good solution to eliminating mortgage insurance.
The loan officer stated that there is a loan program out there called “Lender Paid Mortgage Insurance” or LPMI that is available as long as you have at least as you have at least 5% equity on your home during the refinance. This program was around for a while but was discontinued in 2005 and brought back in 09 according to my loan officer. The way this program works is that instead of paying a monthly PMI premium that is added to your monthly payment, the cost of the PMI is included in the rate. To explain this better lets think of some values as an example:
Home Value: $200,000
Loan Amount: $190,000
Current Rate: 4.25% & Current Rate with LPMI: 4.75%
LTV: 95%
I will ignore taxes and insurance in this example. Calculating the monthly payment of a 30 year fixed mortgage (assuming excellent credit to avoid an increase in interest rate) I come up with $1013.86 if you are going through a conventional borrower paid PMI versus $991.13 if you are using a LPMI loan. Clearly if you are purchasing a house, you have a choice to make. In my case, my current interest rate is 4.75%, meaning if I choose to go with a higher rate LPMI to remove PMI from my loan I will end up with the same rate, and basically eliminate about $100 a month, but everyone’s situation is different.
So LPMI is not for everyone, but it gives you another option to think about. LPMI is good if you are looking for the absolute lowest payment, or if you are interested in moving or refinancing again within the next 10 to 15 years. A conventional Borrower paid PMI might be a better option if you have long term plans of staying where you are at and not refinancing, or if you prefer to have the ability to cancel the PMI down the road. By the way, the closing costs on this loan are the same regardless of refinancing a borrower paid PMI or LPMI and are approximately $1,100.
What are your thoughts on LPMI? Do you think I’m making the right decision?
