Lender paid mortgage insurance

Lender paid mortgage insurance as well as borrower paid mortgage insurance is required when the homeowner makes less than 80% as down payment. Private mortgage insurance commonly referred to as PMI became popular around 2007. One of the factors that attracted homeowners is the fact that payment on PMI was tax-deductible. However, there was a snag. Households whose income was less than USD$100,000 were entitled to the tax-deduction.

Lender paid mortgage insurance came to the forefront as it did away with the drawback of the PMI. In case of lender paid mortgage insurance, household of all income levels could avail the benefit of tax deduction. It was not just restricted to households with income less than USD$10,000. The LPMI attracts a lower insurance rate. As such the lender is required to make a lower payment. However, the lender gets back the money from the payments made by the borrower.

Despite the fact that LPMI offers the benefit of tax deduction, the borrower-paid mortgage insurance is usually preferred over LPMI. The main reason for this is that while borrower-paid mortgage insurance "ends" the lender-paid mortgage insurance doesn't end. The LPMI cannot be ended at the request of the borrower. The borrower is required to pay for the LPMI throughout the loan term at a higher interest rate. The main reason for this is that LPMI is a kind of “Interest rate adjustment” that is made when it is time for the loan to close.

Earlier, in case of lender paid mortgage insurance, interest payments were subjected to tax deductions but the insurance premiums were not. Thereafter, the insurance premiums were made tax deductible too with a limitation. Families having income levels between USD$50,000 and USD$100,000 every month and if the insurances took off in 2007 were entitled to tax deduction on insurance premiums too.

It can be wrapped up by saying that it is important to keep in mind the short-term as well as the long-term financial goals before you opt for either a Borrower-paid mortgage insurance(BPMI) or Lender-paid mortgage insurance (LPMI).