In today's very competitive mortgage market, lenders are attempting to spin everything in a slightly different way than the next guy in an effort to lure a borrower in the door. One fairly recent twist in the ever-changing mortgage market is that lenders are finding that if they pay the mortgage insurance premium for conventional loans with a down payment of less than 20%, they can charge a higher interest rate and not burden the borrower with that additional PMI premium being added to their monthly payment, not to mention an upfront fee for PMI.
According to an article on bankrate.com lenders are charging borrowers between one-quarter to one-half percent higher rate (estimated as actual differential may vary by lender) on loans on which the lender pays for the PMI, commonly referred to as "LPMI". Most likely, lenders are able to procure PMI at a lower premium than each individual borrower as well, although the article did not actual state that fact. But, it only stands to reason that a much more creditworthy, established mortgage lender, buying in bulk, is going to get a better rate than each individual borrower. The actual premium for PMI is determined based on the LTV as well as the borrower's credit score regardless of whether the lender pays the premium or the borrower pays the premium, but as I speculated, lenders are most likely being given a discount.
In an example given by bankrate.com, assume a loan of $225,000, with a 10% down payment. The rate for the loan with borower-paid PMI premiums is assumed at 4.5% and the loan with LPMI is 4.75%. On the borrower-paid PMI
loan the monthly payment (including PMI) is $1,223, which falls to $1,140 after the borrower has an LTV of 78% or less. For the loan with LPMI, the monthly payment is $1,174 and that payment does not change for the life of the loan as the PMI is not dropped when the LTV is 78% or less. Over the thirty year life of each loan, the loan with borrower-paid PMI will have total payments of $421,139, and the loan with LPMI will have total payments of $422,536. This example does assume that the least spread in the interest rate is applied for the LPMI feature. Not sure how realistic that is. The one point brought out by the example though that may be a major consideration is that in the LPMI situation, the PMI is required, or at a minimum paid for over the entire life of the loan.
With a loan with the LPMI feature that has a higher interest rate, there is a practical effect to a certain extent of making the premium for PMI tax-deductible by actually paying a higher rate to the lender to induce the lender to pay the premium for the mortgage insurance. On the other hand, if the borrower plans to stay in the home for the long term, the total payments are less and the borrower can request that the PMI be dropped when the LTV is 78% or less.
Other tricks that the bankrate.com article mentions are a possible split of the PMI premium between the lender and the borrower (which results in a lower monthly payment), or a buy down of the rate by the borrower even after the rate is increased to cover the LPMI feature (which again results in a lower monthly payment), but both "tricks" do require an outlay of some lump-sum payment up front.
There is a lot of number-crunching that is involved with the LPMI feature to determine which option is the better option for the situation at hand. Of course, one way to eliminate the number-crunching is to make a 20% down payment.
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