Let’s start with the general purpose of mortgage insurance. It stands to reason that borrowers who invest in their homes 20% or more by making the first down payment are more likely to succeed in paying off the home loan.
That means they have a stable source of income. Such borrowers are not required to buy mortgage insurance as the lender is already protected by the borrower’s good financial situation and his high credit score.
On the other hand, there are borrowers who want to get a home loan having not enough money for 20% down payment. Lenders, in order to protect their funds, offer borrowers to buy a Mortgage Insurance.
We have described Lender-paid mortgage insurance and its benefits, and now let’s take a closer look at the other type of mortgage insurance – BPMI.
Borrower-paid Mortgage Insurance: specifics and benefits
- BPMI is paid by the borrower and could be chosen by the lender who is confident in his financial stability and ability to make considerable monthly payments along with payments on a mortgage loan.
- BPMI is the best option for borrowers who are not going to sell the house in the nearest future and who expect their home to increase in market’s value.
- Borrower-paid Mortgage Insurance could be cancelled as soon as the borrower’s loan repayments have reached 20% of the home’s value (which is impossible with Lender-paid mortgage insurance)
BPMI can be refundable and non-refundable. The mechanism of insurance refund can be discussed and agreed with the lender.
Cons of BPMI
First of all, BPMI implies an additional budget for monthly Insurance installments. The cost of the insurance and your monthly payments depend directly on the sum of the home’s loan.
Unlike LPMI where cost is included in interest rate, expenses on BPMI is not tax-deductible, which is a significant disadvantage for many. Still, some expenses could be returned through refunding the insurance.
The lender may require Insurance reconsideration in case your home decreases in value. You should always remember that lender will find all possible ways to protect his financial interests and he will do it for the borrower’s cost.
BPMI vs. LPMI – how to make a right choice?
Let’s summarize all said above. So, you should prefer Borrower-paid mortgage insurance if:
- You have enough budget for monthly payments which are about 0.5-1.2% of the sum of the loan.
- You are going to reach 20% of needed down payment in the nearest future so you may cancel payments on mortgage insurance.
- You are going to keep the house for longer than 10-15 years.
- You are ok with the fact that BPMI is not tax-deductible.
On the other hand, you should prefer Lender-paid mortgage insurance if:
- You have an excellent credit score of 700-750 and higher.
- You prefer to pay slightly higher interest rate rather than making monthly payments to the third party (Insurer).
- You are ok with the fact your insurance cannot be canceled and will last a lifetime of your home loan.
You expect your home to increase in its market value in considerable future.