Mortgage insurance (MI) serves as an option to help homebuyers afford a home without putting down a hefty down payment. And for lenders, it is used to protect them in case a consumer defaults on their mortgage. MI is usually required with a down payment that is less than 20 percent of the home’s value on conventional loans and on all FHA loans regardless of down payment size. But even when MI is required, for conventional loans, you still have a choice of how to handle the payment of the insurance premiums. Here we take a closer look at the pros and cons of each type of MI option on conventional loans to help you make the most financially beneficial decision.
Borrower-paid mortgage insurance (BPMI)
With the BPMI option you pay a mortgage premium directly to your lender. The amount of MI you’ll pay will be expressed as a percentage that is dependent on your loan amount, loan type, credit score and more. Payments are typically made by financing the cost and paying a monthly portion with your mortgage payment. However there are other ways to pay for BPMI. The single payment method can be used to pay for all of the necessary MI at the time of your loan closing. If you don’t want to shell out a lot of cash at closing, there is also an option to split the MI costs by paying some at closing and financing the rest into your monthly mortgage payment. However, if you are able to make the entire MI payment at closing, depending how much you put down and how long you plan to be in the home, the single or split payment option could save you more in the long run. With BPMI you have the benefit of being able to cancel MI once certain thresholds are met.
Lender-paid mortgage insurance (LPMI)
Using LPMI, your lender pays the total premium upfront and builds the cost into your overall interest rate. As a result, LPMI will typically have a higher interest rate than other options. But it may offer a lower monthly payment than a BPMI option since you won’t be making MI payments directly. LPMI remains in place for the life of the loan and cannot be canceled. This option may work well for someone who doesn’t plan to live in their home for a long time and wants to reduce their overall monthly costs as opposed to long term interest costs.
The method of payment that makes the most sense for you depends on your current financial circumstances and your future plans. Your Loan Advisor will help you evaluate your choices based on loan type, budget, the length of time you plan to be in the home and your overall financial goals. Talk to a Loan Advisor today to be sure you make the right choice!