Back to Basics: Differences in MI Products and When They Make Sense for Different Borrowers
Mortgage insurance (MI) comes in one shape and size, right?
While all MI products serve as credit enhancements to protect lenders and investors in the event of borrower default, they come in various forms. These differences allow for lenders to select the right product to meet both their borrowers’ needs and their own business strategy.
In this article, we’ll discuss the main MI products that are used in the market today, when a certain product makes sense for a borrower, and what the differences between them are.
Some Basics on MI Products:
Before we begin, let’s establish a baseline understanding about MI products and payment options:
- There are three main payment plans or structures for the payment of MI – Monthly, Single and Split
- The two most widely used ways to fund or pay for MI are either the borrower can pay for the MI directly (borrower-paid MI, BPMI) or the lender can pay for it (lender-paid MI, LPMI)
- There are several combinations we see used regularly in the MI market: BPMI Monthly, BPMI Single, LPMI Single, and Split
Out of all the MI products, BPMI Monthly is by far the mostly commonly used, making up anywhere from 70-80% of the market, depending on the economic environment.
BPMI Monthly is paid each month by the borrower along with their traditional monthly mortgage payments. BPMI Monthly has several advantages that make it attractive to both lenders and borrowers.
First, BPMI payments are not part of the initial escrow funds collected at the time of closing, meaning less cash is required upfront. This allows borrowers who have limited funds the ability to get into a home with a lower down payment and not have to bring additional funds to the closing table for MI activation.
Secondly, BPMI coverage cancels automatically when the home amortizes down (pays down) to 78% Loan-to-Value (LTV) and the borrower is current on their payments.* This means borrowers are only paying for the MI coverage on their home for a limited period. In environments where home prices are increasing significantly, borrowers may be eligible to get their home appraised and determine if they have reached 80% LTV ahead of the scheduled amortization. Doing so would allow them to cancel their MI even sooner than 78% LTV.
Lastly, BPMI Monthly does not impact the interest rate of the loan as other MI payment plans might, so borrowers do not end up paying higher interest costs over the life of the loan.
BPMI Singles are paid for in an upfront sum by the borrower at the time of closing. The advantages of this product are the three ways it can be paid for.
The first is with cash from the borrower at closing. While this does increase the cash needed to close the loan, it creates no increase in the monthly payment of the loan.
The second way is to finance the MI premium into the loan balance. This approach is convenient for borrowers who have limited funds to close with as it rolls the MI into the loan amount (and therefore the monthly payment) but is often cheaper than BPMI Monthly from a monthly payment comparison. The down side to this approach is that now the borrower is paying interest on the MI because it is a part of the overall loan balance, which is not the case for BPMI Monthly.
Lastly, BPMI Single premium can be paid through seller or lender concessions as a part of the overall mortgage agreement. This approach results in no increased monthly payments, interest rates nor cash to close. BPMI Singles may also be cancellable at 78% LTV and potentially eligible for a refund.
LPMI Singles are paid for directly by the lender generally through a mortgage interest rate increase. Lenders “bump” the interest rate and use those additional funds to pay the MI premium on behalf of the borrower.
The benefits of LPMI Singles are that there is no cash to close and the impact to the monthly payment is relatively small. The consideration to keep in mind is that this increases the overall interest cost for the borrower for the entire life of the loan.
Another important consideration of LPMI Singles is that they are not cancelable at 78% LTV. This means that the borrower will be paying for MI for the entire life of the loan regardless of LTV.
Split premium plans are a hybrid of monthly and single MI that can be borrower-paid or lender-paid. They require a small up-front premium that is paid at closing and lower recurring monthly payments than the traditional BPMI Monthly.
This is a unique product if the borrower has cash to bring to closing and wants to reduce the overall monthly MI but not use all the cash for a BPMI or LPMI Single. Splits make up a very small portion of the overall market as it’s often difficult for lenders to service and explain to borrowers.
Compare these MI products using Rate Express®
How Do I Bring All This Together?
At the end of the day, the right product for a lender or borrower is going to depend on the needs of each. For example, if a borrower doesn’t want to bring additional funds to close, isn’t worried about monthly payment and expects to stay in the home for several years, BPMI Monthly is a very attractive option.
Alternatively, if a borrower has funds to close and doesn’t want the interest rate to be impacted, a BPMI Single could make sense.
If a lender is curious about which MI product makes the most sense in a specific situation they should always feel comfortable reaching out to their MI Sales representative with questions.
*Some exceptions apply. Borrowers should check with servicers for details.
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