What is Lender-Paid Mortgage Insurance?
If you don’t have a 20% down payment as a homebuyer taking out a conventional loan, you generally have to pay for private mortgage insurance. Alternatively, you could opt for lender-paid mortgage insurance (LPMI) that won’t increase your monthly payment as much as other options. However, despite having “lender paid” in the name, you’d still pay for LPMI through an increased mortgage interest rate.
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How does LPMI work?
Lender-paid mortgage insurance (LPMI) protects the lender if you default on your loan and allows you to buy a home with less than 20% down. LPMI won’t increase your monthly payment as much as private mortgage insurance (PMI), but there are trade-offs.
LPMI works by increasing your mortgage rate. The amount by which your rate increases can depend on several factors, including your credit score and down payment amount. Here’s an example:
| Interest rate without LPMI | 4.25% |
|---|---|
| Interest rate without LPMI | 4.25% |
| Interest rate with LPMI and a 10% down payment | 4.50% |
| Interest rate with LPMI and a 3% down payment | 4.75% |
LPMI vs. PMI
Private mortgage insurance (PMI) is a monthly charge that is added to your mortgage payment and is typically between $30 and $70 a month for every $100,000 you borrow. You can request a PMI cancellation once you’ve built 20% equity in your home. Otherwise, it automatically ends once you’re halfway through your loan term or you’ve made enough payments to build 22% equity.
LPMI generally has a much lower monthly cost but lasts for the life of the loan.
Pros and cons of LPMI
| Pros | Cons |
|---|---|
Provides a lower monthly payment than PMI Can provide a greater benefit for borrowers with higher credit scores May result in a greater federal tax savings if you deduct home mortgage interest costs | Is likely more expensive than PMI in the long run The higher interest rate lasts for the entire loan repayment term You can’t remove LPMI regardless of how much equity you build Can be more expensive for borrowers with low credit scores |
When is it good to have lender-paid mortgage insurance?
If you’ll live in your home for only a short term. If you plan to only live in your new home for five years or so before selling it, you might not get near the 20% equity mark you’d need to drop monthly PMI.
When you earn a high income. Mortgage interest is deductible on your federal taxes; a higher mortgage rate may be especially appealing to high-income earners.
How to get rid of LPMI
Because the cost of LPMI is woven into your mortgage interest rate, you need to refinance or pay off your mortgage to get rid of it. If you refinance and don’t have 20% equity in your house yet — maybe because of a cash-out refinance — you’ll still need to pay mortgage insurance on your new home loan.
Alternatives to lender-paid mortgage insurance
Find a mortgage without a PMI requirement
You may see lenders advertise special loan programs that don’t include a mortgage insurance requirement. Depending on your credit and the home you’re buying, you may be able to find a mortgage that doesn’t require PMI.
Make a bigger down payment
If you make a 20% down payment, you won’t need LPMI at all. If you don’t quite have enough cash, you can still make a larger down payment and choose to pay monthly PMI. The less you borrow, the less you’ll pay in mortgage insurance.
Pay for monthly mortgage insurance
You could opt for borrower-paid mortgage insurance (BPMI), which is another term for PMI.
Use a financial assistance program
There are tons of financial assistance programs available for homebuyers. Here’s a short list:
- Down payment assistance
- First-time homebuyer programs
- Federal Housing Administration (such as FHA loans)
- U.S. Department of Veterans Affairs (such as VA loans)
Get a second mortgage
You could get a second home loan, or a second mortgage, to fund a 20% down payment. The downside: You’ll have a second monthly payment. To see if this is a smart option, compare the cost of a second mortgage to that of LPMI or PMI.