Mortgage insurance is once again being regularly used as a means to fund home loans with less than 20% down. Obtaining a second mortgage to cover the difference between the 80% LTV first mortgage and the down payment has become difficult, but the good news is that MI companies are allowing people to finance properties with less than 20% down by sharing the risk with lenders. For borrowers, that means that their mortgage payment will include the principal and interest plus a mortgage insurance premium rolled into the monthly payment, or through a lender paid mortgage insurance loan. The amount of the MI premium varies based on factors such as the amount of the down payment or equity in the home (5%, 10% or 15%), credit scores, the loan type and term,occupancy, etc.
With borrower paid MI, the home owner pays the MI premium until the loan is paid down to 80% of the original sales price or appraised value at the time the loan was taken out. As the home appreciates in value over time, the MI premium can be removed at 75% LTV if the MI has been paid for a minium of 2 years.
There is an alternative to borrower paid MI that is gaining popularity as MI has become more common again. It's called Lender Paid Mortgage Insurance (LPMI) or Tax Advantage Mortgage Insurance (TAMI) and almost always results in a lower payment than traditional borrower paid MI. With LPMI loans, the interest rate is increased slightly depending on down payment, loan type, credit, occupancy, etc., and the mortgage insurance premium is removed. For example, if an interest rate is at 6% on a loan with 10% down with borrower paid mortgage insurance, the rate on the LPMI loan is increased to 6.25% and the mortgage insurance premium is removed. The result is a lower payment. Here's an example on a $300,000 loan amount:
- Borrower Paid MI @ 6%: $1799 Principal & Interest + $130 MI = $1929.
- Lender Paid MI @ 6.25%: $1847 PI + 0 MI = $1847.
The LPMI option saves $82/month.
The downside with LPMI is that when the loan is paid down to 80%, the rate does not decrease, however, the BPMI, the borrower is stuck paying $82 per month for a minimum of 2 years and probably a lot longer because it takes 75% LTV to remove the MI through appreciation.