Mortgage insurance, or PMI, is typically required on residential mortgage loans with greater than 80 percent loan-to-value on the first lien. The purpose of PMI is essential to protect the lender in the event you default on the mortgage, and it is required for higher LTV loans because there is a greater risk of default on these mortgages. Mortgage insurance can be expensive, and in some cases, it can add hundreds of dollars onto your expenses each month. There are essentially two ways to obtain a higher loan-to-value mortgage without having to pay mortgage insurance. The first is to structure a combination loan with a first and a second lien. The second is to apply for a mortgage with Lender Paid Mortgage Insurance or LPMI.
What to Expect With LPMI
With an LPMI program, you generally will have a slightly higher interest rate than with a standard PMI program. You should keep in mind that the PMI is not tax deductible, but your mortgage interest charges are. Therefore, you can analyze both options to determine if the extra tax deduction from the LPMI option is a better solution for you from a financial standpoint. You can apply for a loan-to-value for up to 97 percent, which makes the program ideal for those who have minimal funds available for a down payment.
The Alternative of a First and Second Lien
Some may think that they can save money by avoiding PMI and the higher interest rate with the LPMI program altogether by setting up a first and second lien. For example, you may apply for an 80 percent LTV first lien and a 17 percent LTV second lien. This structure will eliminate the PMI payment and the higher rate associated with LPMI. However, the second lien interest rate is often several percentage points higher or more than a first lien. Therefore, there is a cost associated with this option as well.
If you are looking for the most affordable loans for your upcoming real estate purchase, it is wise to reach out to MortgageDepot. Each borrower and each loan scenario is unique, so there is not a single solution that is most affordable for everyone. When you work with our mortgage representatives, we will help you to explore all of the options so that you make the best decision about your mortgage. Contact MortgageDepot for mortgage information about our loan programs.