Many of you have probably seen this new lender practice but it is relatively new in our market area.
Mortgage lenders are now offering to pay the mortgage insurance for a buyer for the life of the loan. The only condition is that the interest charged on the loan is higher.
Let's say your borrower borrows $150,000. On a regular mortgage your borrower is charged 6% interest. However, with mortgage insurance paid by the lender the lender raises the rate to 6½%. Do the math on a 30 year loan and you will see the extra ½% rate costs your borrower an extra $17,559.45 over the 30 years.
Lets say the mortgage insurance would have cost your borrower say $45/month added to his/her monthly payment. As we all know, after a borrower has established 20% equity through appreciate and paying down of the principal balance they can request a re-evaluation, pay for an appraisal, and opt out of paying mortgage insurance.
If the spread in rates is not large it is not a big issue in my book. However, look out for your buyer and if the spread between rates is too large then your borrower would be much better off paying his/her own mortgage insurance and opting out of paying the mortgage insurance a few years down the road.
Your borrowers will be happy you are looking out for them.
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HI George:
I would certainly not want my buyers signing up to pay all that extra money! And since the cost of PMI is deductible until 2010 it would seen as though anyone buying now would be very close to meeting the equity standard for removal of the PMI within the next couple years and they would be getting an extra deduction, too! Thanks for pointing out this program. I haven't seen it around here yet, but anything is possible!