LPMI, PMI and 80/20 Mortgages…Oh My!
Rhonda Porter on 05 11, 2007
Note: I should have titled this post: ”LPMI, PMI and Piggy Back Mortgages…Oh My”. I just realized my error thanks to Bill’s comment. My bad…my apologies! And there’s no way for me to 80/20 in the title.
LPMI (Lender Paid Mortgage Insurance) is one of my favorite mortgage products to use for clients with less than [photopress:wiz.jpg,thumb,alignright]20% down. Here are some of the benefits of an LPMI mortgage:
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Loan amounts up to the conforming loan limit (currently $417,000 for a single family dwelling).
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Mortgage interest tax deductible for adjusted gross incomes over $100k (unlike PMI).
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Convenience of one mortgage payment vs. two mortgage payments on a property.
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Often provides lower payments a lower total mortgage payment than the “piggy back” scenario.
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No additional closing costs for a second mortgage (title, escrow and recording fees).
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Loan to value ratios up to 100%
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Credit scores as low as 620
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Pricing is credit score and loan to value based
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Works great with Flex and My Community Programs (or without!)
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Available for conforming products: 30 year fixed rates and 5/1, 7/1 and 10/1 ARMs, including interest only
For the following scenarios, let’s assume our buyers have 700 mid scores and 10% down and 5% down payment and closing costs for a $439,000 home that they will reside in. (This is not intended to be a rate quote and is only a comparison of possible programs).
| 10% Down | PMI | 1st & 2nd | LPMI |
| 1st Mortgage | |||
| Loan Amount | 395,100 | 351,200 | 395,100 |
| Interest Rate | 5.875% | 5.875% | 6.125% |
| Loan to Value (LTV) | 90 | 80 | 90 |
| 2nd Mortgage | |||
| Loan Amount | n/a | 43,900 | n/a |
| Interest Rate | n/a | 7.75% | n/a |
| Loan to Value (LTV) | n/a | 10 | n/a |
| Monthly Payment (PI) | |||
| 1st Mortgage | 2,337.17 | 2077.48 | $2,400.67 |
| 1st Mtg. PMI | 171.21 | n/a | n/a |
| 2nd Mortgage | n/a | 315.15 | n/a |
| Total Monthly Payment | $2,508.38 | $2,392.63 | $2,400.67 |
| 5% Down | PMI | 1st & 2nd | LPMI |
| 1st Mortgage | |||
| Loan Amount | 417,000 | 351,200 | 417,000 |
| Interest Rate | 5.875% | 6.00% | 6.250% |
| Loan to Value (LTV) | 90 | 80 | 90 |
| 2nd Mortgage | |||
| Loan Amount | n/a | 65,800 | n/a |
| Interest Rate | n/a | 8.13% | n/a |
| Loan to Value (LTV) | n/a | 15 | n/a |
| Monthly Payment (PI) | |||
| 1st Mortgage | 2,337.17 | 2105.62 | 2567.54 |
| 1st Mtg. PMI | 271.05 | n/a | n/a |
| 2nd Mortgage | n/a | 488.56 | n/a |
| Total Monthly Payment | $2,608.22 | $2,594.18 | $2,567.54 |
The rate on LPMI programs are slightly higher than conforming rates since the cost pmi is financed into the rate. However, the mortgage interest is tax deductible and pmi is currently deductible for mortgages originated this year (they’re trying to have this expanded into the future) and for incomes below $100k.
A plus for PMI vs. LPMI is that PMI can be removed once certain conditions are met. LPMI cannot be removed without refinancing or selling the home. There are times when having a second mortgage may make sense over having LPMI, such as if a borrower is expecting to come into cash and wants to pay off the second mortgage.
Every borrower’s personal scenario varies and this is why it’s crucial to work with a Mortgage Professional who will take into account what someone’s financial goals are to develop plan that is suitable and who has a complete selection of programs to offer.
Mortgages are certainly not a “one size fits all” product. 
About the Author: Rhonda Porter
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13 Responses to “LPMI, PMI and 80/20 Mortgages…Oh My!”
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I was reading on Bloomberg the other day that 80/20 mortgages give the buyer a significant increase in foreclosure protection over a single mortgage. With foreclosures rising all over the country, I’d think buyers with borderline credit scores or unstable employment outlook may be better served with a piggyback loan.
Hi Bill, is this on-line? I’d to read that. I’m not sure how the buyer would have more protection from a foreclosure. If you don’t make your payment…the bank will be knocking at your door (or their attorneys) regardless of how your mortgage is structured. Even if you have 20% down with just a mortgage at an 80 LTV.
I would love to read the article.
My opinion about “unstable” borrowers is that with an 80/20, they might try to just pay one mortgage and delay the other which would still be damaging. Typically the second mortgage rate is significantly higher with a 100% LTV. I might have to do a post on that!
I need to correct my title…what was I thinking! It should should Piggy Back Mortgages…since it’s an 80/15/5 and 80/10/10. My BAD.
Yes, here is the article.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a5fh0edyc_CM
Bill,
I’m not seeing anything about the second mortgage being foreclosure proof for subprime borrowers. I think what the article is saying is that second mortgages are whiped out in a foreclosure. I’m not meaning “forgiven” to home owner, either. The first mortgage takes precedence and if the home has declined or not gained in value, then there is little left for the second lien to recoup in a foreclosure.
“Proof” no – just that non payment is less likely to result in foreclosure than it would on the first. There’s been bit of discussion lately among investors that are using this strategy to hold onto multiple properties. The key is that in many cases, the second lien holder has nothing to gain by initiating a foreclosure, so forcing one would hurt them more than accepting non-payment. I can’t see this being a good alternative for someone with A credit, but if you’re credit score is already borderline the risk to the borrower is lower.
I’m not seeing how a borrower has less risk of being foreclosed on having a piggy back vs one mortgage. (Thanks for the link to the article, BTW).
I guess I’m confused about the whole piggyback situation. If I don’t have the liquid resources to afford a normal mortgage, what is the advantage to purchasing, especially in this market where real estate values are decreasing? Wouldn’t it make more sense to rent something less expensive and save my money until I can get a traditional new purchase loan and not have to worry about foreclosure at all?
ProspectZone, our local area in Seattle is not experience a decrease in sales prices at this time. What is a “normal” mortgage? By the time most people would save enough for 20% down, they are “out priced” of the market. Often times, my clients who have put 5 or 10% down may either benefit from appreciation by getting into the market vs. waiting or they have the extra funds to put down but opt to stay liquid and earn interest on those funds instead of investing it into “home equity” which does not provide a return.
I am thoroughly confused on these two options and neither are my two bankers able to give me a concrete answer to it. I am buying a 209,000 home with 0 down. I am getting 80/20 at 6.375/8.5 with no points and 100% LPMI at 6.75 %. We plan to stay in house for around 3-5 yrs. Pls guide me which would be better for me. I have seen amortization schedule of both options till 5 yrs and there isnt any major difference in principal balance. Monthly payment of LPMI is $ 10 less than 80/20 and I save around $ 400 closing cost in LPMI. But these benefits of LPMI are coming to be very small in magnitude thus really not sure if from current and future perspective, whether LPMI or 80/20 would suit me. Your inputs would be highly appreciated. I have to tell my banker tomorrow – Sun (11/25) on which way to go else he says that I might get caught up in rate increase of Monday. My contact number is 847-521-0119. Will really appreciate your quick response so that I dont lock up into a wrong mortgage plan.
Thanks
Rahul
Rahul, your “blended rate” for the 80/20 is 6.8% and as you can see from your payment difference and closing costs savings, the LPMI seems to be a slightly better option. Plus, you’re only writing one check instead of two for your mortgage each month. Since you’re only planning on holding the mortgages for a couple of years, the differences of either will be small. At $10 per month, the choice is more about convenience.
On a side note, if you’re planning on selling the home in 3-5 years, you may want to consider how much it costs to do so in your area (in the Seattle area it’s approx. 9% including commissions, excise tax and seller closing cost fees) and if the projected values in 3-5 years are in your area will support paying the cost to sell.
I just found out the loan we got in the fall of 2005 had a LMPI on it yet it was not disclosed in any of our papers including the Hud-1 settlement. Is that legal? Our home was refinanced at that time into a 30 year fixed. It appraised at $255,000 and the mortgage was for $164,000. Everything in our papers state no PMI or mortgage insurance.
Nancy, how do you know your mortgage has LPMI?
Your loan to value is under 80%…however, it is still possible that the bank insured your mortgage with private mortgage insurance. They would have paid for it to protect themselves from the risk of you defaulting. I’ve even heard of second mortgages having private mortgage insurance paid for by the lender without the consumer knowing.
How is the mortgage insurance impacting you?