Mortgage Insurance Options For Conventional Loans
Consider the differences between the different private mortgage insurance (PMI) structures themselves. Monthly PMI, single premium financed, and lender paid all have their place. There are substantial benefits to each of these options depending on your overall financial needs.
- Lender Paid PMI (LPMI)
This product is now the industry leader. In exchange for a slightly higher interest rate, the client avoids paying PMI insurance for the duration of the loan. Even though the higher rate remains for the extent of the loan term, this mortgage insurance option may provide the borrower with the lowest monthly payment (typically LTV’s of 97% or less).
- Monthly PMI (BPMI)
Probably the most common PMI policy issued. Can often be the most expensive. Probably the worst deal for the client and is only really beneficial if the loan is going to be short-term in nature, or the borrower will have an accelerated equity position sooner rather than later. While other plans do exist (such as annual) these are the three that are the most common and the pitfalls/benefits associated with them.
- Single Premium Financed PMI (Temporarily discontinued by Fannie Mae and Freddie Mac)
Perhaps the best kept secret in the industry. Why? Because many lenders don’t understand how it works. Single Premium PMI allows you to finance the MI premium as a lump sum into the loan amount. This eliminates the need for monthly PMI and can give the borrower a substantially lower monthly payment. Yes, this is an acceptable form of mortgage insurance with Fannie and Freddie (works similar to the upfront mortgage insurance premium (UFMIP) for an FHA loan). The loan-to-value ratio (LTV) is calculated prior to adding the cost of the mortgage insurance premium to the loan (resembling UFMIP on FHA).