Dennis' Mortgage Blog

Question of the week:  What is the advantage of lender paid mortgage insurance?

Answer:  Lender paid mortgage insurance is just that, instead of you paying a mortgage insurance premium every month you lender pays the mortgage insurance for you.  This does not happen just out of the kindness of the lender’s heart, but rather through a higher interest rate on the mortgage. 

The primary benefit of LPMI (Lender Paid Mortgage Insurance) is a lower total housing payment as the increase in rate is generally lower than the mortgage insurance premium rate.  This is very helpful if the borrower is very tight on income to debt qualifying ratios.  The secondary benefit is the potential tax deductibility of mortgage interest versus mortgage insurance.

Congress has been extending the deductibility of mortgage insurance for qualified borrowers each year from 2007 and now it is extended through 2011.  The basic formula is deduction is allowed to 100% of premium if your adjusted gross income is $100,000 or less, then the deduction phases out for incomes up to $109,000.  Check with your CPA or tax preparer on your specific deductions and allowances of both interest and mortgage insurance premiums. 

One more option that many borrowers might want to investigate is to pay the full mortgage insurance premium upfront, an option that those who may earn more than the allowable deduction in 2012, or if you feel the deduction will not be extended for 2012.  By paying the full premium at closing you may be eligible to write off the entire premium in one year.

The primary argument against LMPI or lump sum premium payment is that with the traditional monthly MI premium payment a borrower can eliminate the payment in the future when their mortgage balance become less than 80% of the value of the property.  Depending on real estate values in the future, simple amortization will take approximately eight years before you can lift the mortgage insurance premium.  Keep that in mind as you aggregate the savings below.

Here is a comparison of payments for the three options based on a $400,000 mortgage at 90% loan to value on a $444,000 purchase.

Traditional Mortgage Insurance:  Borrower pays monthly premium (I’ll use 5% rate to keep numbers easier):

Principal & Interest at 5%:                    $2147/mo

Mortgage Insurance at 0.76%:                   253/mo

Total monthly                                      $2400/mo

Lender Paid Mortgage Insurance:  Lender charges higher interest rate

Principal & Interest at 5.25%                $2209/mo.

Lump Sum Payment:  Borrower pays up front premium of $8,400 (note seller may pay as part of contract):

Principal & Interest at 5%:                    $2147/mo.

Summary:

Choosing the lender paid MI option over the monthly borrower paid MI saves borrower $200 per month, or $2400 per year.  If it takes eight years before the monthly MI premium can be removed due to loan to value the lender paid MI option saves $19,200.  I will take another six years to save the money you could have already saved once the MI is eliminated ($19,200 divided by $253/mo savings).  Essentially taking the monthly MI over the LPMI option you are eschewing $200 per month for eight years to save $253 per month after eight years.

As for the upfront option, borrower spends $8400 up front to save $253 per month over the monthly premium option, a payback of 33 months ($8400 divided by $253 savings); or spends $8400 to save only $62 per month over LPMI option, a pay back of 140 months, or over 11 years.  This option warrants consideration if you have the $8400 additional to spend on your transaction.  Chances are you would be better served going with the LPMI option and not adding to your closing costs.

Overall the best financial option for most borrowers with mortgage insurance is to choose the Lender Paid Mortgage Insurance option if it is available.

Have a question for me?  Ask me!

The big news this week is the possible shut down of the federal government.  As I write this at noon on Friday Pacific time there has been no agreement and no extension.  So far the bond markets are shrugging off the no government option and the equity markets are only down slightly, the Dow currently down 72 points, or about 0.60%.  I guess investors are not too worried about the shut down and not adding $9.3 billion per day to the deficit, seven days a week including Christmas, Easter, and Bastille Day.  It appears the Republican majority in Congress is through with the two and three week extensions and are now holding firm on significant spending cuts in the budget.  Likewise the Democratic majority, and the White House, seem to be holding firm on snipping from the edges of the spending problem.

Yesterday I posted on my blog, (link here and below) on the impact on the mortgage and housing industries if there is a government shutdown. Obviously there would be some impact on federally insured FHA and VA mortgages in process that could have delayed approvals and/or closings.  The primary factor that will impact all mortgages in process is IRS form 4506 which is a standard requirement on all files these days. The form is sent to the IRS and is a request for a copy of the tax transcripts filed for the borrower.  Underwriting then compares the 4506 results to the application to ensure there are no deductions, additional income, etc that need to be investigated and underwritten as part of the file.  With a government shut down the IRS will not be processing the 4506 requests and as a result files in process that have not yet had this form in the file will be delayed for final approval until the government is operating and the IRS processes the request.

The other big news this week, also posted, was the lifting of the stay imposed on the Fed for implementation of regulations that dictate mortgage originator compensation.  Effective April 6^, 2011 no longer can originators receive compensation from borrowers and lenders.  The rule also impacts and dictates how companies can pay their personnel.  The net impact of the ruling will be increases in fees and rates as lenders and originators learn how the rule works and impacts their bottom lines.  In the end any rule made to protect the consumer inevitably costs more money to implement and that is always passed down to the consumer—expect no difference here.  Net benefactors of the regulation are the larger lenders, most dominant in the market being in order Wells Fargo, Bank of America, Chase and Citi.

Thanks for the feedback!  Overall feedback has been more positive than negative from those who have commented on my changing the Weekly Rate & Market update with less news and adding links to blog posts through the week.  Unless a groundswell of criticism erupts I will continue.  You can check My Blog daily, or follow me on Twitter (dcslb) or my new Stratis Financial Facebook page which you can “like.”

This week’s blog postings:

Mirror, Mirror, On the Wall, Who’s the Fairest Bond Of All? What is a good bond investment?  It appears Mortgage Backed Securities meet all the criteria, as detailed in Monday’s post.

What Me Worry?  Tuesday’s post looks that the Federal Reserve and Ben Bernanke channeling Alfred E. Newman regarding inflation and what you are paying for hamburger and gasoline.

Loan Originator Compensation Rules From the Fed In Force Posted Wednesday, a review of the regulation and look at the impact on mortgage applicants and the industy.

Will Government Shut Down Impact Mortgage Process?  A look at what part of mortgage process will be impacted.

Feedback is always welcome!  Please let me know if what you think of a bit more information through the week on specific economic events and issues relating to the mortgage and housing markets versus more detail on the Friday update.  Instant feedback click here

Rates for Friday April 8, 2011:

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS*

30 year conforming                               4.875%             Flat

30 year high-balance conforming           5.125%             Up 0.125%

30 year FHA                                         4.625%             Up 0.125%

30 year FHA jumbo                              5.00%               Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. 

*With new Fed regulations in place cost increase has been added to weekly rate quote.  Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment with an impound account for taxes and insurance and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected.  Numbers provided are for comparative purposes only.

ANOTHER NEW FEATURE!  Always looking to add value to your free Weekly Rate and Market Update I have started an Open House page on my website that is kicking off this week.  Click on the link below and you will go to the page that will provide you with finance profiles of homes on the market you can see this weekend.

Weekend Open Houses

Baseball is here! The Smiths are going out to Anaheim Stadium tonight for home opener and start of 50^th Anniversary celebrations for the Angels, hot dogs, peanuts, a beverage, still great family entertainment.

Have a great week,

Dennis