Is 4.25% better than 4.0%?
I did a quick analysis of Lender Paid Mortgage Insurance (LPMI) vs. Traditional Monthly Mortgage Insurance (MI) based on a 10% down conventional loan. I tried to keep the closing costs about the same so I went with 4.0% for the traditional and 4.25% for the LPMI. The rate is higher for the LPMI option because the lender (me in this case) would pay for the mortgage insurance in a lump sum amount directly to the mortgage insurance company. The borrower would not pay any mortgage insurance on a monthly basis with their payment.
The total monthly payment with the traditional MI option was $62 more per month for the first 81 months. This is when the loan balance reaches 78% of the original purchase price and the monthly MI would drop off the payment. At that point, the total payment for the traditional MI option would be $45 less than the LPMI option for the remaining 279 months of the loan term. Here is a breakdown of each payment:
- Traditional MI: $1458 (P&I) + $107 (MI) = $1565
- LPMI Option: $1503 (P&I) + $0 (MI) = $1503
The borrower would save about $5022 ($62 x 81 mos) witht he LPMI option during the first 81 months. However once the MI drops off after the 81st month, the borrowe would save $11,160 over the remain term of the loan ($45 x 289 mos).
So if a borrower planes to keep the house less than 7 years (about 81 months), then the LPMI option is actually a better option!
Interesting isn't it! Sometimes 4.25% is indeed better than 4.0%. Depends on how long the borrower expects to keep the mortgage.