Massachusetts Home Buyer Guide

No home buyer wants to pay mortgage insurance (MI), commonly referred to as private mortgage insurance or PMI, but saving enough money for a 20 percent down payment to avoid PMI, especially in the high-cost Boston area real estate market, is easier said than done.

Home buyers have an alternative to the first-time home buyer and other home loan programs that place income and other limitations on borrowers. Lender paid mortgage insurance (LPMI) is an option for Massachusetts home buyers who do not have enough money saved for the 20 percent down payment needed to avoid mortgage insurance, but want to reduce their monthly mortgage payments. 

With a LPMI option, a borrower's mortgage lender pays the mortgage insurance premium upfront in a lump sum and passes on the cost to the borrower in the form of a higher interest rate. The interest rate for LPMI loans are often one-quarter to one-half a percent higher, but interest rates sometimes can be outside of that range, either lower or higher. The borrower then does not have to make monthly mortgage insurance payments.  

Most home buyers don’t realize that even with the slightly higher interest rate that comes with an LPMI loan, the monthly mortgage payment is lower than what the payment would be with the standard monthly PMI cost. Private mortgage insurance, both regular and lender-paid, gets more expensive with higher loan-to-value ratios or lower credit scores.

LPMI also helps borrowers trying to stretch their buying power. A borrower typically qualifies for a slightly larger loan amount with a LPMI mortgage than with a monthly PMI mortgage because of the lower monthly payment.

"A LPMI option can benefit those buyers who are trying to keep their monthly payment down," said Melissa Caci, the branch manager for Residential Mortgage Services in Woburn. "On the other hand,  if you are concerned about debt ratios or trying to stretch your buying power to the very maximum limits, LPMI could be great option for you too."  

Another appealing feature of LPMI is that since borrowers are paying a higher interest rate and mortgage interest may be tax deductible on federal income taxes, a borrower will actually have a larger tax deduction than he or she would with a PMI loan. Unfortunately PMI is no longer an IRS allowable deduction, so by rolling the cost of the mortgage insurance into the interest rate a borrower should have a bigger tax deduction. Homeowners should consult with their accountant or tax adviser.

The following example is an comparison between a monthly PMI mortgage and a LPMI mortgage based on a $350,000 purchase price with a 10 percent down payment. 

The LPMI mortgage reduced the borrower's monthly mortgage payment about $70 in the example above. 

Home buyers often are obsessed with mortgage interest rates only, but it is also very important to take the time to discuss with an experienced mortgage professional all the available mortgage financing options to determine what loan program is the best fit. 

The preceding post is for informational purposes only and is not a commitment to lend. Programs, rates, terms and conditions are subject to change at any time. Availability dependent upon approved credit and documentation, acceptable appraisal, and market conditions. Not all programs available in all areas. Residential Mortgage Services, Inc. is a Maine Corporation headquartered at 24 Christopher Toppi Drive, South Portland ME 04106. NMLS# 1760; www.nmlsconsumeraccess.org; Equal Housing Opportunity. Click here [https://www.rmsmortgage.com/about/state-licensing] for list of state licenses.