You are thinking to purchase a house but you are hesitating because of insufficient funds for paying out the down payment. People wanted to pay out the down payment just to avoid the extra burden of private mortgage insurance. If you are also suffering from this, you should try out the option of lender-paid mortgage insurance (LPMI). If Inadequate fund is the only obstacle stopping you from taking the benefit of low interest rates, you should look out for this option.
What is a Private Mortgage insurance
PMI is a policy which ensures the interest of the lender if the borrower failed to pay of the mortgage. This process will reimburse the entire amount of the loan to the lender, making his investment risk free. Generally, lenders needed PMI if the loan amount becomes more than 80 percent of the property's value. The Federal Housing Administration (FHA) also sells PMI.
PMI – How to avoid the extra burden
Through the process of LPMI, the mortgage lender will bear the mortgage insurance premium instead of you. He will pay in upfront a lump sum amount as the premium, in return he will add the cost of premium along with the interest by charging you a higher rate of interest. The interest rate might go higher by 0.5% or 0.25% if the LPMI process is applied, but sometimes it might go beyond that limit, either higher or lower.
The difference between PMI and LPMI
There is an Example – You are willing to purchase a $300,000 home and not able to arrange the 20% down payment for avoiding PMI. You can only able to put down $30,000 (10%) as down payment, so you are bound to pay private mortgage insurance payment every month.On the other hand, in LPMI process you will be paying 10% downpayment, not more than that. Your lender will be paying the PMI insurance premium fully through a lump sum amount. Your monthly mortgage payment will be getting higher as the rate of interest will be increased.
Cost effectiveness of both type of mortgage insurance
Whether it is a normal PMI or Lender-paid PMI, The cost of Private mortgage insurance becomes much more expensive if your credit score is low and/or the LTV (Loan to value) ratio is higher. Loan-to-value ratio means the ratio of outstanding mortgage loan amount / the total value of the home (after appraisal)
Cost reduction of of LPMI
There are several options by which you cut down the cost of lender-paid mortgage insurance. As an example, you can buy down the rate of mortgage loan interest with discount points. This is the method where you have to pay only the calculated normal interest rate, not the added additional percentage along with it. You can also ask your seller of the house to buy down your part of the interest rate.
Your lender would pay the half of the total PMI upfront, & you can pay the other half through monthly payments as a part of the mortgage interest. You are still paying the PMI but that would be much lower than the conventional terms.
Tax of benefits of LPMI
If you avail LPMI, you'll get some benefit from it which you can not get from normal private mortgage insurance. The amount you'll be paying as a premium is not tax deductible. But the money you will be paying as monthly mortgage interest payments are tax deductible.
The LPMI is tax deductible, as much as you will be paying as additional interest percentage. The higher the interest amount, your tax deduction will also be higher. PMI has been considered tax deductible before, but currently it is not.