Is ‘single-premium’ MI right for your borrower?

Part II. I don't understand the mortgage insurance choice called lender-paid mortgage insurance (LPMI). What I don't understand is how a lender could pay this cost for a borrower. How does that work? And why is it an advantage over mortgage insurance paid by the borrower?

--Enrique from California

Last week we talked about how lender-paid mortgage insurance works and the advantages and disadvantages of this option as compared to borrower-paid mortgage insurance. This week we wanted to get more specific by going over a hypothetical example of single-premium LPMI.

First, what is single-premium mortgage insurance? The single-premium option allows the borrower to pay the MI in a lump sum, rather than monthly. The cost could be paid up-front or financed into the loan amount – if the final loan amount is below the allowable LTV for the loan program.

For example, here are some hypothetical numbers (for actual rates MGIC provides a Rate Calculator for quotes and MI option comparisons).

·         Option One: 4.00% mortgage with a single premium of 3.0%, or $6,000 paid by the borrower on a $200,000 loan amount.

·         Option Two: 4.00% mortgage with a $206,000 loan amount.

·         Option Three: 4.50% mortgage with the single-premium paid through a higher interest rate.

In the case of option three, it is assumed that the lender will receive a three-point rebate by selling the loan "above-par" in the secondary market. Therefore, option three would be the lender-paid option.

There are many mortgage insurance options, and it is important to understand the advantages and disadvantages of each option for each particular client's situation so that you can deliver the best advice possible for your clients.

--Dave Hershman

Dave Hershman has been the leading author and a top speaker for the industry for decades with six books authored and hundreds of articles published. His website is www.originationpro.com. If you have a reaction to this commentary or another question you would like answered in this column? Email Dave directly at [email protected].