We are seeing borrowers come to us with quotes from online lenders for conventional loans with LTV > 80% but NO mortgage insurance. What the borrowers don’t realize is they are being quoted for a Lender-Paid Mortgage Insurance product (LPMI).
With LPMI, a lender simply waives PMI requirements in exchange for a higher interest rate.
For example, a $400,000, 90% LTV loan might be at “No Points” at 4.25%* with a PMI rate of 0.44% (for strong borrowers). Alternatively, this same borrower would be at 4.625%* with LPMI and NO PMI payment (Lender waives PMI requirement in exchange for a 0.375% higher rate).
This might seem like a great deal on the surface because the LPMI interest rate is lower than the combined interest and PMI rate.
Nevertheless, we discourage LPMI because of what happens when rates and values go up, which is anticipated later this year. If rates go up 2% and home values go up 10% (and they will), the borrower with PMI can eliminate his PMI requirement and live happily ever after with his 4.25% rate. The LPMI borrower in contrast will be stuck with his higher rate forever, irrespective of home appreciation; his thinking was too short term when he took out his loan.
Jay Voorhees at (925) 855-4491
Real Estate Broker, CA Bureau of Real Estate, BRE# 01524255, NMLS# 335646