A borrower is offered lender-paid mortgage insurance at 6.875% or borrower-paid at 6.375% with a $148 monthly premium.
Correct Answer
C) The 0.5% is the cost of LPMI, and it cannot be canceled at 80% later
Lender-paid insurance is bought with a higher rate, and because there is no separate premium there is nothing to cancel: the rate stays for the life of the loan unless the borrower refinances. Other choices: nothing drops off when equity reaches 80%, because that cancellation right under the Homeowners Protection Act belongs to borrower-paid insurance; the lender does not absorb the premium, it prices it in, so LPMI is not always cheaper; and the two are not identical in cost merely because the premium has been repriced into the rate, since one can end and the other cannot. Source: LPMI versus BPMI and cancellation rights
Why This Is the Correct Answer
Lender-paid insurance is bought with a higher rate, and because there is no separate premium there is nothing to cancel: the rate stays for the life of the loan unless the borrower refinances. Other choices: nothing drops off when equity reaches 80%, because that cancellation right under the Homeowners Protection Act belongs to borrower-paid insurance; the lender does not absorb the premium, it prices it in, so LPMI is not always cheaper; and the two are not identical in cost merely because the premium has been repriced into the rate, since one can end and the other cannot. Source: LPMI versus BPMI and cancellation rights
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