Lender paid mortgage insurance is getting more attention these days. It did not use to be a common scenario because rates used to be so much higher than they are today. With the lower rates we are able to obtain, we can afford for it to be bumped up a quarter percentage or even a half of a percentage point in order for the lender to pay for the insurance. This is true even for borrowers that were planning to put down 20 percent on the purchase of their home in order to avoid paying PMI at all. Why should you opt for mortgage insurance, lender paid or not? Here are a few reasons.
Upgrades in a New Home
Building a home from scratch can be a lot of fun until you get to the part of the building process that you see how much each of the add-ons are to make the house exactly what you want. As you sit and think about the gourmet kitchen you desire; the upgraded carpeting; or the enhanced elevation, you might desire to make changes, but without a lot of wiggle room in your loan, your hands are tied. If you were putting down 20 percent on your home, however, you can free up some of that money by opting for lender paid mortgage insurance. You no longer have to put 20 percent down – say you only put 10 percent down now and have that other 10 percent to put towards upgrades. Yes, your interest rate will be slightly higher in the end, but you get the upgrades you desired and you will likely have the option to refinance into a lower rate once the value of your house increases in a few years and you are below that 80% benchmark and will not need mortgage insurance any longer.
Furnish your Home
Whether you are purchasing a new or existing home, you need to furnish it! It is no fun to move into a home and have blank walls and empty space for too long. If you used all of your assets to make the down payment on your home, you will either have to rely on credit or wait until you have more assets to make large purchases. If waiting does not make you very happy, consider putting less down on the home and taking the lender paid mortgage insurance. Again, your interest rate will be slightly higher, but as long as you do not borrower too much, say 95%, then you will be able to reach that 80% benchmark sooner rather than later. This is kind of like having your cake and eating it too – you get the house you want and the furniture to fill it without having to extend your credit any further or put yourself in any further debt. Of course, this will only work if you have good credit and your debt ratio is able to accept the slightly higher interest rate.
Make Repairs on an Existing Home
If the home you are purchasing needs repairs, typically these are just cosmetic, you can use some of your down payment money to make those repairs. They obviously cannot be repairs that are structural or damaging to the home as the home would not pass an appraisal to get lending in the first place if that were the case. If you desire different paint colors; to finish the basement; or even to knock a wall down to make an area more open, you can use some of the money that you would have used for the down payment on these changes. In exchange, you can take the lender paid mortgage insurance and a higher interest rate. You can consider the higher interest rate your interest on the money you needed to fix the house. It is really like a win-win situation because you get the house you want and the changes you desire in the end. Yes, your mortgage payment will be slightly higher than it originally was, but you are making your house a home – a home that you love to live in every day.
If you use these reasons to opt for lender paid mortgage insurance, know that you will be able to refinance out of the higher rate in the future. As long as your credit and DTI stay the same or get better, you should not have a problem refinancing down the road. Do your homework or talk to a realtor to see what the values have been like in the area you are looking to purchase a home to see if the area has recovered from the housing crisis. As long as values are rising, you should be able to refinance in a few years, when you have more equity in the home and are able to be below 80% and get that lower interest rate that you were going to take originally before you decided to keep some of your assets to make your home look just how you wanted it to look. This is the perfect solution for those that see themselves staying in this home for a long time; it is not the right choice for anyone that sees this as a short-term living solution, though.
Justin McHood is America's Mortgage Commentator and has been providing expert mortgage analysis for over 10 years.
