Scott Storace - Branch Manager, 100 Pacifica Drive Ste. 140, Irvine CA 92618 NMLS #226339 949.973.0141

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Mortgage Insurance Alternatives

We have all heard about mortgage insurance. And most people know they aren’t excited about it. It can be very expensive, adding hundreds of dollars to your monthly payment. One of the oldest home buying myths is that you shouldn’t set foot into an open house until you have 20% for the down payment sitting in your savings account. This 20% was required to avoid paying Private Mortgage Insurance (PMI).

No matter in what part of the country you are looking to purchase, twenty percent is a lot of money to set aside. If you manage to save it and then use all of it to put toward your down payment, will you be able to cover closing costs? What about moving fees? Would you be ready ‘just in case’ something happens? Thankfully there are a couple of options if putting that amount of money down is outside of your comfort zone.

80-10-10

Taking out a second loan for the down payment is one way to avoid mortgage insurance. This is referred to as an 80-10-10. It is two loans. There’s a first loan consisting of 80% of the value and a second loan consisting of 10% of the value. The borrower brings in the remaining 10%. You are technically putting down twenty percent but typically only need to bring 10% to the table for your down payment. The second loan makes up for the rest of the down payment. This can be broken down into various increments. For example, you could put down 15% and get a 2nd loan for 5%. This is called an 85-15-5 and would accomplish the same goals.

Another benefit of having a 2nd is that it can be paid off and closed at any time. The first mortgage does not need to be refinanced to remove it. However, most 2nds are Home Equity Lines of Credit which are tied to the Prime Rate. Therefore, they are adjustable. The payment will rise or fall soon after the Federal Reserve Board of Governors vote to raise or decrease the Fed Funds rate.

LPMI

Another way to avoid or work around mortgage insurance is through Lender Paid mortgage insurance, or LPMI. With LPMI the mortgage insurance cost is factored into the interest rate. Borrowers do pay a slightly higher interest rate. The additional monies obtained with this pricing plan will be used to cover the MI cost at a much lower monthly payment amount.

The primary benefit of LPMI is that it tends to have the lowest payment relative to a 2nd or Borrower Paid mortgage insurance. However, unlike a 2nd or BPMI, lender paid mortgage insurance can only be removed through refinancing.

As with any decision, there are pro’s and con’s to each option. They are all tools. Therefore it’s important to understand your short and long term plans. Understanding the big picture will help identify the tool that’s most appropriate for you.

Reach out to us to go over your possibilities today!

Mortgage Insurance

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