Alternative Mortgage Insurance Premium Plans
January 8, 2001, Reviewed December 12, 2007
While there are a number of alternative mortgage insurance premium plans, about 90% of the policies today carry monthly premiums. An attractive alternative to the monthly premium plan is the financed upfront premium, where a one-time premium is included in the loan amount. It converts the premium into interest, which is deductible. Few lenders offer it, however, and few borrowers are aware of it.
"I have been approved for a loan but the lender has not disclosed anything about my private mortgage insurance options. All I know is that the premium will be $95 a month. Aren’t there different ways to pay for mortgage insurance, and isn’t the lender obliged to tell me what they are and how much they cost?"
Yes, there are different PMI options, but no, the lender has no legal obligation to tell you about them. But you can ask and expect an answer.
There are a number of ways of paying for PMI but several of them are historical relics and rarely used. Today, about 90% of the policies carry monthly premiums. On a monthly premium plan, the quoted annual premium is divided by 12 and multiplied by the loan amount to get the monthly premium payment. These are the premiums shown in PMI Premiums.
For example, a quoted premium of .39% amounts to a monthly premium payment by the borrower of $32.50 for each $100,000 of loan amount. This is the premium quoted by one major company on a 30-year fixed-rate mortgage used to purchase a primary residence with 10% down and insurance coverage acceptable to the Federal agencies.
An attractive alternative to the monthly premium plan is the financed upfront premium, where a one-time premium is included in the loan amount. The upfront premium on the loan cited above is 2.35%, which increases the loan amount to $102,350. Assuming an interest rate of 8%, the mortgage payment would increase by $17.25. Further, $15.66 of the additional payment is additional interest that is tax deductible. For a borrower in the 28% tax bracket, the increase in mortgage payment net of tax savings is only $12.87. This is less than half of the premium under the monthly plan, which is not deductible.
The downside of the financed upfront premium plan is that the borrower will have a higher loan balance when the loan is repaid. However, loan repayment in the early years results in a partial refund of the premium. In the example above, refunds are 92% after one year, declining to 50% after 6 years and zero after 12 years.
Unfortunately, few borrowers are aware of this attractive alternative because most lenders don’t offer it. Fannie Mae and Freddie Mac require lenders to obtain special authorization to use this program on loans that are sold to them. Most lenders prefer to avoid this inconvenience, and they aren’t pressed because few customers are aware of the option.
While there are a number of alternative mortgage insurance premium plans, about 90% of the policies today carry monthly premiums. An attractive alternative to the monthly premium plan is the financed upfront premium, where a one-time premium is included in the loan amount. It converts the premium into interest, which is deductible. Few lenders offer it, however, and few borrowers are aware of it.
Lenders Are Not Obliged to Offer Premium Options
"I have been approved for a loan but the lender has not disclosed anything about my private mortgage insurance options. All I know is that the premium will be $95 a month. Aren’t there different ways to pay for mortgage insurance, and isn’t the lender obliged to tell me what they are and how much they cost?"
Yes, there are different PMI options, but no, the lender has no legal obligation to tell you about them. But you can ask and expect an answer.
There are a number of ways of paying for PMI but several of them are historical relics and rarely used. Today, about 90% of the policies carry monthly premiums. On a monthly premium plan, the quoted annual premium is divided by 12 and multiplied by the loan amount to get the monthly premium payment. These are the premiums shown in PMI Premiums.
For example, a quoted premium of .39% amounts to a monthly premium payment by the borrower of $32.50 for each $100,000 of loan amount. This is the premium quoted by one major company on a 30-year fixed-rate mortgage used to purchase a primary residence with 10% down and insurance coverage acceptable to the Federal agencies.
Financed Upfront Premium Is Attractive But Not Widely Available
An attractive alternative to the monthly premium plan is the financed upfront premium, where a one-time premium is included in the loan amount. The upfront premium on the loan cited above is 2.35%, which increases the loan amount to $102,350. Assuming an interest rate of 8%, the mortgage payment would increase by $17.25. Further, $15.66 of the additional payment is additional interest that is tax deductible. For a borrower in the 28% tax bracket, the increase in mortgage payment net of tax savings is only $12.87. This is less than half of the premium under the monthly plan, which is not deductible.
The downside of the financed upfront premium plan is that the borrower will have a higher loan balance when the loan is repaid. However, loan repayment in the early years results in a partial refund of the premium. In the example above, refunds are 92% after one year, declining to 50% after 6 years and zero after 12 years.
Unfortunately, few borrowers are aware of this attractive alternative because most lenders don’t offer it. Fannie Mae and Freddie Mac require lenders to obtain special authorization to use this program on loans that are sold to them. Most lenders prefer to avoid this inconvenience, and they aren’t pressed because few customers are aware of the option.