Conventional mortgages are ideal for borrowers with good or excellent credit. Conventional
mortgages are "plain vanilla" home loans. They follow fairly conservative guidelines for:
• Borrower credit scores: Minimum 620
• Minimum down payments: Minimum 3% with Home Ready Fannie Mae program or 5% for
• Debt-to-income ratios: Maximum 45% vs 56.99% for FHA and 65% for VA
(DTI is the percentage of monthly income that is spent on debt payments, including
mortgages, student loans, auto loans, minimum credit card payments and child
support.) Conventional mortgages generally pose fewer hurdles than Federal
Housing Administration or Veterans Affairs mortgages, which may take longer
to process. What is not as good is that you will need excellent credit to qualify
for the best interest rates.
• Low down payment required (3 percent minimum)
• Mortgage insurance is required for loans exceeding 80 percent loan-to-value
(Mortgage insurance is required on all FHA loans regardless of the loan-to-value)
however, Bluecastle Lending has Lender Paid PMI financing. See our No PMI page.
• Conventional mortgage insurance is only monthly or single premium (FHA is
upfront and monthly premiums, and VA has a similar fee called Funding Fee)
• Conventional mortgage insurance will automatically end at 78 percent loan-to-value
(FHA will stay for the entire life of the loan)
• Conventional mortgage insurance is very credit sensitive
• Conventional loans can cover a higher loan amount; up to $417,000.00 vs. $345,000.00 for
FHA and $417,000.00 for VA. Loan amounts over $417,000.00 become “Jumbo loans”.
• Even though conventional loans may have higher interest rates, their monthly payments may still
Bluecastle Lending has excellent Conventional loan rates although most of our clients putting less than 20%
down payment will finance the loan with lender paid mortgage insurance, as the payments are usually lower
than paying with mortgage insurance, even the rate is slightly higher.
For information on this program contact Bluecastle Lending at 954-866-0000, email alex@BluecastleLending.
com . Bluecastle Lending is an Equal Opportunity Lender
No PMI / Lender Paid Mortgage Insurance
For many potential homebuyers, the cost of mortgage insurance can be a big turn-off. For those who can't
come up with a 20 percent down payment, the thought of having to pay an additional monthly premium can be
enough to discourage them from buying a home in the first place.
However, there's an alternative that may save you money. Though you don't hear a lot about lender-paid
mortgage insurance (LPMI), it's an option that's been growing in popularity and which can save you hundreds,
even thousands, of dollars a year in mortgage costs.
LPMI isn't for everyone, but it's something many borrowers can benefit from. If you've got good credit, are
planning on a small down payment and expect to either sell the home or refinance within a decade or so, it
might be the right choice for you.
Mortgage insurance, of course, is what is required on any mortgage with less than 20 percent down (or 20
percent equity when refinancing). It covers the additional risk the lender assumes in accepting a smaller down
LPMI vs. PMI and FHA
Private mortgage insurance (PMI) is the most common type. You pay a monthly premium that's added onto your
mortgage statement and paid to an independent mortgage insurer. FHA loans have their own mortgage
insurance that's paid directly to the FHA. You pay both a single upfront fee at the time you take out the loan
and then a monthly fee that's tacked onto your mortgage statement.
LPMI works a bit differently. Rather than you buying insurance for your loan, your lender buys insurance to
protect itself. This cost gets passed along to you, of course, but instead of paying an additional fee on your
mortgage statement, the cost of the insurance is rolled into the loan itself in the form of a slightly higher interest
So what's the advantage? The big difference is that, rather than you buying a single insurance policy as an
individual, the lender is negotiating to give an insurer all of its business on thousands of loans. That means it
can obtain a big price break, with some of the savings passed along to you.
Savings can be substantial
How much can you save? Quite a bit, depending on your situation. Currently, LPMI will boost your interest rate
by about one-quarter to one-half a percentage point. PMI, on the other hand, typically ranges from an annual
cost of about 0.55-1.3 percent of your loan amount, depending on the size of your down payment, your credit
score and the length of the loan.
Suppose you're looking at a $250,000 mortgage with a fixed rate of 4.0 percent over 30 years. That gives you
a base payment of $1,193.54 a month. With fairly typical PMI annual charges of 0.5-0.8 percent of the loan
amount, you're looking at roughly an additional $100-$170 a month for mortgage insurance.
Now consider LPMI. An additional half percent would boost your mortgage interest rate to 4.5 percent, for a
monthly payment of $1,266.71. A quarter-percent adjustment, to 4.25 percent, would mean a monthly payment
of $1,229.85. That means you're paying only an additional $36-$73 a month for LPMI, compared to $100-$170
a month for PMI.
For comparison, mortgage insurance costs on a $250,000 FHA mortgage with a 30-year term would be a 1.75
percent fee at closing ($4,375) and an annual premium of at least 0.80 percent of the loan amount, or about
$170 a month.
(Note that the above monthly costs do not include charges for homeowners' insurance and property taxes,
which are typically billed as part of the monthly mortgage statement.)
In addition, because it's rolled right into your mortgage rate, the cost of LPMI is fully tax deductible for those
who itemize. While it's possible that Congress may extend and retroactively restore the former tax deduction for
PMI that expired at the end of 2014, that's far from uncertain. Also, the PMI deduction is phased out on
household incomes over $100,000, while there's no income limit for the mortgage interest deduction.
Can't be canceled
Sounds great, right? So what's the catch?
Actually, it's a fairly significant one. Because the cost of LPMI is built into your interest rate, you're stuck with it
for the life of the loan. PMI, on the other hand, can be canceled once your mortgage balance falls below 80
percent of your home's current value.
At today's rates, it will take you about six years to reach an 80 percent loan-to-value ratio through normal
amortization if you put 10 percent down, or about eight years with a 5 percent down payment. If home values
rise during that time, you can get there even faster. So even though LPMI can knock a big chunk off your
monthly payment, it's only a temporary benefit.
For this reason, LPMI works best for people who don't expect to stay in the home for a long time. If you plan to
move again within 7-10 years, you may still come out ahead with LPMI even if you could have canceled PMI a
few years before then
Another strategy would be to refinance your mortgage once you reach an 80 percent loan-to-value ratio (20
percent equity) into a new loan that doesn't require mortgage insurance. However, with mortgage rates as low
as they currently are, there's a very good chance that within a few years they will have risen more than the
additional fraction of a percent you'd pay for LPMI, in which case there'd be no point in refinancing. And even if
rates stay low, refinancing would involve thousands of dollars in closing costs.
You generally have to have fairly good credit to qualify, with a FICO score in the 700s or better. In addition, the
rate adjustment you pay will be tied to your credit - the lower your score, the bigger the increase.
It's also not a good choice for people who are making a more substantial down payment - say 15 percent down.
With that much equity to start with, you'd be able to cancel PMI in just a few years anyway, so LPMI wouldn't
offer much of a benefit unless the difference in pricing is minimal.
A hypothetical example
John and Mary buy identical houses for $250,000. Each makes a down payment of $25,000 and borrows
$225,000. Both of them have to get private mortgage insurance, but they select different types. Lupe gets
regular, borrower-paid mortgage insurance, which is dropped automatically when the loan balance falls below
78 percent loan-to-value (in this case, it takes 7 years and 2 months
John (borrower-paid mortgage John insurance) Mary (lender-paid mortgage insurance)
Interest rate 4.5 percent 4.75 percent
Monthly principal and interest $1,140 $1,174
Monthly PMI $83 $0
Monthly principal, interest and PMI $1,223 $1,174
Monthly principal and interest after 86 months $1,140 $1,174
All payments, 10 years $143,900 $140,845
All payments, 20 years $280,705 $281,690
All payments, 30 years $417,509 $422,536
One thing this example does not take into consideration are the tax savings of LPMI. $34.00 every month for
360 payments equates to $12,410.00. Assuming a 25% income tax bracket, it will save you $3,102.50 in tax
credits that you will not otherwise have. The difference between both programs then is $1,924.50 over the life
of the loan in favor of paying PMI vs LPMI. Is it worth it?
For information on this program contact Bluecastle Lending at 954-765-6567, email alex@BluecastleLending.
com . Bluecastle Lending is an Equal Opportunity Lender
CONVENTIONAL LOANS - UP TO $417,000.00