Lender Private Mortgage Insurance (LPMI), is as its name suggests, mortgage insurance that protects the lender in case of a borrower's default. LPMI is a misnomer because the borrower pays for the insurance in the form of a slightly higher interest rate. Unlike PMI that the borrower pays for directly, with LPMI there is no automatic cancellation of the insurance charge once the borrower equals 22% equity. To eliminate LPMI, the borrower must refinance the loan.
LPMI has one potential advantage over PMI. As I write these words in late 2010, PMI is still tax deductible for homeowners earning less than $100,000. If you earn more than $100,000, then LPMI might be a smarter option. Congress has looked warily at PMI as a tax deduction for many years, and may eliminate it in the future. If Congress removes PMI as a deduction, LPMI will become more attractive because its cost is rolled into the interest rate. Note, however, that some in Congress want to eliminate the mortgage interest deduction altogether.
You are familiar with the old phrase, “There is no such thing as a free lunch.” LPMI is not a free lunch — homeowners pay for LPMI in higher interest. It is also a bad deal if you plan to own your home long enough to exceed 22% of equity. Mortgage insurance is a bad deal anyway for homeowners because if they default the beneficiary is the lender. Upon default, the insurance provider often pursues the homeowner for the loss, which makes mortgage insurance an especially bad deal for homeowners.
Lenders standardly require homeowners with less than 20% equity to buy PMI.
You are in a tough position. If you are applying for HARP, then it seems safe for me to assume that you either are underwater on your home or have very little equity. A standard refinance is not an option.
While my reading of the HARP guidelines do not show any Fannie Mae or Freddie Mac requirements that preclude a lender refinancing a loan with LPMI under HARP, it appears that lenders are making this decision on their own. Clearly, this limits the number of people who can take advantage of HARP, contrary to the announced goals of the program. (Editor's Note: President Obama announced on October 24th, 2011 some significant changes to HARP. While the final guidelines are yet to be released, it appears that the LPMI issue will be addressed, allowing borrowers who have been unable to participate in HARP to now do so. Check back at Bills.com, to stay informed about the new HARP rollout.)
It doesn't seem to me that you will get relief unless the government holds lenders' feet to the fire or revises the HARP program.
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