You have have heard of it... No PMI (Mortgage Insurance) with only 5% down.
Is it true and does it work? Yes and yes!
Typically, when you put 5% down on a Conventional Mortgage loan you are paying mortgage insurance that is ordered via the bank and paid in your monthly mortgage payment. Hence why it is called “Monthly Mortgage Insurance”. Because you are purchasing PMI as an individual consumer for a one time loan, the rate Is higher. The banks came out with an ingenious way to make a better alternative for their clients. It’s called LPMI (Lender Paid Mortgage Insurance).
Don’t misread this, there is a catch.
The bank is not paying for your mortgage insurance because they are super generous with no benefit to themselves. Instead, they are buying mortgage insurance on your behalf at a bulk level at discount costs. This means that the lender, due to their volume, with private mortgage insurance companies are able to get special pricing. So, what the bank does is they purchase the mortgage insurance on your behalf and then increase your interest rate slightly to pay for this cost. At the end of the day your payment ends up being $50-80 less a month. One benefit of this is if you make over the IRS income threshold for writing off mortgage insurance you can now write off the increased interest effectively saving you more money. Also, the break-even point between the higher rate vs paying mortgage insurance takes over 20 years which most folks will not keep their loan long enough to experience.
Here is an example:
Borrower with a 760 credit score applying for a $200,000 loan amount with 5% down on a 30 year mortgage term. At 4.375% with standard mortgage insurance the payment is $1096 and at 4.75% with LPMI (no mortgage insurance) the payment is only $1043/month. That is $53/month savings for the same loan amount.
I’m up for dialogue about this and forgive me in advance if I didn’t use the most technical or politically correct terms J. I wanted to break this down to make it more understandable for the everyday mortgage applicant.
*Images courtesty of chicagonow.com