What is LPMI? Why use it?

By
Mortgage and Lending with Mason-McDuffie Mortgage, Conventional Loans, Jumbo Loans, FHA, 203(k), USDA, VA, NMLS #138061 MMCD #1141
https://activerain.com/droplet/48Rg

 

What is LPMI?

 

Mortgage tax deductions

     LPMI is Lender Paid Mortgage Insurance - rather thanstandard mortgage insurance which shows up in a borrowers monthly payment, with LPMI the lender pays for the mortgage insurance coverage on behalf of the borrower.  Borrowers pay the lender for this coverage through a higher interest rate adjustment or an up front fee.

 

     Now more than ever, LPMI can be a great option for home buyers because it can result in a lower monthly payment.  It can also allow a buyer to qualify for a higher purchase price than a loan with regular monthly PMI.  Since congress has not renewed legislation to make PMI tax deductible (it was deductible the past few years), PMI has become even more expensive & LPMI offers an even greater advantage than in the past.

 

How does it work?

 

     The cost associated with LPMI comes as a pricing/rate adjustment.  For example, with a FICO score of 740+ and a down payment between 10-15%, the LPMI adjustment on current rate sheets is 1.37 points ($1370 on a $100,000 loan, 1.37% of the loan amount).  A borrower can absorb this pricing adjustment into the interest rate, or pay the pricing adjustment at closing to keep the rate the same as it would be with a monthly PMI loan.

 

Let's look at an example:

 

$300,000 purchase price, 3.5% down FHA loan (740+ FICO)

4.125% interest rate
$1427 principal & interest payment
$326 PMI payment

$1753/month TOTAL (Plus taxes & insurance)

 

Now let's look at a similar conventional loan with 5% down and LPMI (740+ FICO)


$4.875% interest rate (rate higher to absorb LPMI adjustment)
NO monthly PMI payment

$1534/month TOTAL (Plus taxes & insurance)

 

     This particular adjustment (5% down, 740+ FICO score) is 2.15 points being absorbed into the interest rate.  Even with the higher rate, a conventional loan with LPMI offers a much lower payment than a similar FHA loan.

 

Some other benefits of LPMI:

 

  - LPMI can be paid for with sellers assistance - always worth considering when writing up a sales contract with less than 20% down.

 

  -  Since LPMI adjustments generally result in a higher interest rate, a portion of the additional cost can be offset with the interest deduction. (I am NOT a tax professional, so consult one for clarification)

 

Is LPMI always a good idea?

 

     While it's always a good idea to consider, it's not always the right choice.  With lower credit scores and lower down payments LPMI can get pretty expensive!  It is also not available for FHA loans, so a buyer has to have 5% down payment. 

 

     If a buyer knows they'll be in their home for an extended period of time, sometimes monthly PMI is a better option because it can be cancelled when the home owner accrues equity.  If a higher rate is taken to get LPMI, the rate is higher for the life of the loan.

 

How do I know which option is best?

 

     If you're putting down less than 20%, be sure the lender you're working with is familiar with different options for mortgage insurance.  We can easily create comparisons and scenarios with different programs & products.  Your lender should be able to help you decide which option is the best one for you.  Have questions on LPMI, PMI, or mortgage programs in general? Ask an expert!

 

 

 

 

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Re-Blogged 1 time:

Re-Blogged By Re-Blogged At
  1. Lenn Harley 01/02/2014 10:02 PM
Topic:
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Rainmaker
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Carla Muss-Jacobs, RETIRED
RETIRED / State License is Inactive - Portland, OR

Something to think about when consulting buyers who don't have the 20% down.  Is this only on the FHA loans??

Jan 02, 2014 04:27 AM #2
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John Meussner
Mason-McDuffie Mortgage, Conventional Loans, Jumbo Loans, FHA, 203(k), USDA, VA, - Walnut Creek, CA
#MortgageMadeEasy Walnut Creek, CA 484-680-4852

Marjorie - Thanks for the comment.  Most lenders offer LPMI and it's been available for a while but has become more and more valuable as alternatives become more expensive.

Carla - definitely a consideration for those who need mortgage insurance.  It's actually NOT available thru FHA, only on Conventional loans.  Thanks for stopping by!

Jan 02, 2014 05:01 AM #3
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Joe Pryor
The Virtual Real Estate Team - Oklahoma City, OK
REALTOR® - Oklahoma Investment Properties

Thanks for the reminder and this certainly gives the buyer more upward purchase ability or works better in a budget. I also appreciate the reminder that this can be paid by the seller. 

Jan 02, 2014 05:23 AM #4
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John Meussner
Mason-McDuffie Mortgage, Conventional Loans, Jumbo Loans, FHA, 203(k), USDA, VA, - Walnut Creek, CA
#MortgageMadeEasy Walnut Creek, CA 484-680-4852

Joe - thanks for the comment!  Using seller assist proceeds to pay the rate adjustment has been great for a few clients, if the opportunity to do so is there it is a great option.

Jan 02, 2014 05:43 AM #5
Rainmaker
633,497
Bill Reddington
Re/max Southern Realty - Destin, FL
Destin Florida Real Estate

Always lots of options out there. Don't really have any FHA loans in this area. Maybe in the furure. Lots of VA.

Jan 02, 2014 05:46 AM #6
Rainmaker
908,388
Pamela Seley
West Coast Realty Division - Murrieta, CA
Residential Real Estate Agent serving SW RivCo CA

John, thanks for the explanation on LPMI. Always best to consult a mortgage expert who has access to more than one loan program. 

Jan 02, 2014 06:04 AM #7
Rainer
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Jimmy Faulkner
Florida. Homes Realty & Mortgage - Wantagh, NY
The Best Of St. Augustine

John, thank you for the very valuable information on LPMI. I did not realize that it is tax deductible, which can make all thee difference in the world.

Jan 02, 2014 09:00 AM #8
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Paul McFadden
Paratex - Seattle, WA
Pest Control, Seattle, WA.

John: Thanks for the info. My boss and I like single premium MI too!

Jan 02, 2014 09:07 AM #9
Rainer
42,738
Tony Garcia
Homeside Financial, LLC - Charlotte, NC
Sr. Mortgage Loan Officer since 2001

With 10% down, I do financed single premium.

Jan 02, 2014 12:03 PM #10
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Praful Thakkar
LAER Realty Partners - Andover, MA
Andover, MA: Andover Luxury Homes For Sale

John, thanks for sharing info on LPMI - seems beneficial for some of my buyers. However, 740+ Fico is going to be challenging for few of my buyers.

Also, it's nice, you pointed out where LPMI is not going to be good. Very balanced, informative post.

Jan 02, 2014 12:41 PM #11
Rainmaker
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Nina Hollander
Coldwell Banker Residential Brokerage - Charlotte, NC
Your Charlotte/Ballantyne/Waxhaw/Fort Mill Realtor

This was news to me! It's the first I heard of this option. Now I know to ask about it in certain circumstances.

Jan 02, 2014 08:39 PM #12
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Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

Mortgage insurance is just one of the variables on a closing cost estimate.

Agents need to know what these items are. 

This is a wonderful explanation.

Jan 02, 2014 11:05 PM #13
Rainmaker
2,746,578
Kathleen Daniels
KD Realty - 408.972.1822 - San Jose, CA
San Jose Homes for Sale-Probate & Trust Specialist

John, this is good information for everyone to know. You have given great scenarios of how it works and the savings as well as when it may not be the right choice.

 

Jan 02, 2014 11:07 PM #14
Rainmaker
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Kat Palmiotti
Grand Lux Realty, Monroe NY, 914-419-0270, kat@thehousekat.com - Monroe, NY
The House Kat

This was a very useful description of another possibility in terms of mortgage insurance.  Thanks for sharing.

Jan 02, 2014 11:50 PM #15
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John Meussner
Mason-McDuffie Mortgage, Conventional Loans, Jumbo Loans, FHA, 203(k), USDA, VA, - Walnut Creek, CA
#MortgageMadeEasy Walnut Creek, CA 484-680-4852

Bill - thanks for the comment, it's a great option for anyone with less than 20% down using conventional financing

Pamela - thank you, it is always good to have as many options as possible.

Jimmy - usually it's applied as an increased interest rate - if their interest is deductible it'll help.  Thanks for stopping by!

Paul - thanks for the comment, its a great option and surprisingly under-utilized.

Tony - always good to have multiple options for PMI, no one solution is good for every client.  Thanks for the comment.

Praful - thank you for reading & commenting - keep in mind it's not ONLY good for those with perfect credit, it just gets more expensive with lower FICO's and lower down payments.

Nina - glad you learned something new!  If you have any questions about different PMI options don't hesitate to give me a call.

Lenn - thank you, and I agree - it's a lenders job to let clients & Realtors know about these things because it can play an important role in contract negotiation and verbiage.

Kathleen - thanks so much, it's important to analyze each individual scenario to see if LPMI is a good fit.

Kat - thank you for reading/commenting, glad you found it useful!

Jan 03, 2014 12:58 AM #16
Rainmaker
43,939
Ninah Hunter
Coldwell Banker Distinctive Properties - Ridgway, CO
REALTOR®

Nice explanation, John.  Although the math may overwhelm some, the point is that there are options, and not one option fits all borrowers.  The lender or investor will get paid one way or the other.  It's up to the borrower to crunch the numbers with his or her lender to determine which option meets the borrowers' needs and objectives best, as you so aptly point out.

Jan 03, 2014 01:05 AM #17
Rainer
147,350
Paul Collier
Patriot Home Mortgage - Huntington Beach, CA
Paul Collier

I have to keep people focused to stay with LPI numbers to make sure it's a good fit for them. Great information!

 

Jan 03, 2014 04:38 AM #18
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John Meussner
Mason-McDuffie Mortgage, Conventional Loans, Jumbo Loans, FHA, 203(k), USDA, VA, - Walnut Creek, CA
#MortgageMadeEasy Walnut Creek, CA 484-680-4852

Ninah - thanks!  It is up to a borrower, lender, and Realtor to work together to work up a loan program & offer that most benefits the buyers.  Like you said, lots of options available.

Paul - thank you, it is tough explaining all the info but giving someone all the options that offer a benefit is important.  Have a great weekend!

Jan 03, 2014 09:39 AM #19
Rainmaker
1,143,921
David Shamansky
US Mortgages - David Shamansky - Highlands Ranch, CO
Creative, Aggressive & 560 FICO - OK, Colorado Mtg

Its always a matter of time.

If in the home AND the loan for a long time then it may make sense to use LPMI but if maxed on LTV and potential to move is in the future you will likely be ahead choosing monthly over the up front option as some of those take many years to break even.

 

Jan 03, 2014 09:39 AM #20
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John Meussner
Mason-McDuffie Mortgage, Conventional Loans, Jumbo Loans, FHA, 203(k), USDA, VA, - Walnut Creek, CA
#MortgageMadeEasy Walnut Creek, CA 484-680-4852

David - always a matter of time & finances.  Thanks for the comment & have a great weekend!

Jan 03, 2014 09:45 AM #21
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