Did you know that you have an option to have your lender pay the Mortgage Insurance (MI), and that you can take advantage of a higher mortgage interest deduction with a qualifying tax basis? 

 

Most of us know about mortgage insurance and that, for some of us, it is not tax deductible so it is something to avoid. In years past the desire to avoid MI led to the creation of combo loans, for example an 80-10-10 where the borrower could finance a portion of the down payment as a second mortgage. Because it has become more difficult to get these second mortgages now, borrowers should be aware of a little known alternative: Lender Paid Mortgage Insurance (LPMI).

 

LPM is not new to the mortgage business. If you’re planning to put down less than 20% of the purchase price, it might just be the right solution for you.

 

LPMI is a single payment MI that is funded by the lender, essentially using “rate premium” funds to purchase your policy. “Rate premium” is paid to a lender for charging a higher interest rate. Banks, mortgage bankers and mortgage brokers can use this “spread” to purchase the MI, which you pay for in interest - which is tax deductible in most cases! Therefore with LPMI a higher rate can actually save you money.

We recently had a borrower with an excellent credit score of 767. We were able to give him a 95% loan with no monthly MI at a rate of 5.375%. The market rate for a 30-year fixed loan that day was 5% with standard monthly MI. Despite the slightly higher interest rate, his total monthly payment was $110 less. For this borrower, LPMI has tax benefits as well. All of his interest payments made at 5.375% are tax-deductible. With a household income of over $100K, he would not have been able to deduct monthly MI payments from his Federal taxes. It will take approximately nine years of standard payments to get to 78% (the point at which monthly MI payments automatically drop off). In this time he will have saved $11,888 in MI payments.

So when should you consider LPMI on your purchase? If you’re putting less than 20% down, it’s worth looking into. To qualify, the middle of your three credit scores must be at least 680, and you’ll need to put at least 5% of your own funds toward closing (the rest can be a gift). There are a couple of other factors to consider: