Written By: Dan Moralez, Sr. Vice President, Republic Bank
Many clients prefer to avoid paying PMI insurance whenever possible. However, the truth is many of those same clients prefer not to make the two different mortgage payments that result. Often times the interest rate for the second mortgage is higher than the first mortgage and/or has a variable interest rate.
One way to eliminate paying PMI on a monthly basis and avoid the combination of two loans is to use what is known as single premium financed mortgage insurance. This option works best for clients who have a minimum of a 10% down payment.
With financed mortgage insurance, the client pays the entire PMI premium up-front in one lump sum. By doing this, their cost of PMI is greatly reduced. The PMI Company is receiving the entire premium in one lump sum vs. a small portion on a monthly basis; thus, the decrease in monthly premium. Of course the best part of financed mortgage insurance is that it is financed into the mortgage, eliminating the need for the client to have additional funds at closing.
Many lenders are compensated based on their first mortgage production and earn a small to no commission on second mortgage originations. With financed mortgage insurance, all of what your client is going to borrow is in one mortgage that includes the financed PMI. This will increase the amount of your loan and your commission, while at the same time benefiting your clients. In addition, there is the ability to originate a simultaneous home equity line of credit. This increases your potential to earn even more.
Speaking of home equity loans, when a borrower takes a combination of a first and second mortgage, they have eliminated the ability to take a home equity loan if needed. Most lenders would require the borrower to pay off their current second mortgage as part of a new home equity loan, which would result in the borrower being subject to interest rate risk and potentially shorter amortizations.
A client may ask, “Why would I want to pay all of my PMI up-front if I am hoping to drop PMI at some point?” The answers are simple: you are able to finance the up-front PMI into your loan amount, which in a sense makes the PMI tax deductible; in addition, you are making a lower monthly payment than if you paid the PMI on a monthly basis; and, best of all, you can still cancel the PMI and receive back a prorated refund of what you paid up-front.
To understand the scenario we are going to review, you will need to understand the basics of up-front financed mortgage insurance. Here are the numbers:
Written By: Dan Moralez
