What is Lender-Paid Mortgage Insurance?
Private mortgage insurance is insurance that protects a lender from potential losses if a borrower defaults on a home loan. Private mortgage insurance is often paid for by borrowers as a part of their mortgage payment but, in some cases, you can opt for lender-paid mortgage insurance (LPMI). With LPMI, the lender pays for the mortgage insurance, but that doesn’t mean it’s free. The lender passes the cost of LPMI on to you in the form of higher interest rates on your mortgage.
- What is lender-paid mortgage insurance?
- How does lender-paid mortgage insurance work?
- Pros and cons of lender-paid mortgage insurance
- Alternatives to using LPMI
- FAQs about lender-paid mortgage insurance
What is lender-paid mortgage insurance?
With lender-paid mortgage insurance, the lender (rather than the borrower) covers the upfront cost of PMI. In exchange for having PMI costs covered upfront, the borrower typically pays a higher interest rate over the life of their loan.
Understanding the PMI meaning is essential to making an informed decision about which type of mortgage to get, how much to put down and whether to pay PMI yourself or ask a lender to cover it. Even though PMI seems like an extra expense that doesn’t benefit you, it does. PMI allows lenders to loan money to borrowers that they might not have otherwise considered, reducing risk for the lender.
How does lender-paid mortgage insurance work?
Mortgage insurance is required for most borrowers getting a conventional mortgage or a loan backed by the Federal Housing Administration who make a down payment of less than 20%. Your lender may provide lender-paid mortgage insurance versus borrower-paid (BPMI) as options.
With BPMI, you may pay the premiums upfront, as part of your monthly mortgage payment or both. If you pay BPMI as part of your monthly mortgage payment, your mortgage insurance payments are held in escrow, or a third-party account and then sent to your mortgage insurer. With LPMI, your lender pays the premiums directly but charges a higher interest rate on your loan.
When it comes to LPMI versus BPMI, how do you choose? It depends on your priorities and your financial situation. The cost of PMI depends on your down payment and credit score. Lenders differ when it comes to the interest rate they charge for LPMI. You may have a lower monthly payment with LPMI depending on those factors, but you might pay down your mortgage balance more quickly with BPMI. Here’s an example for a $150,000 home loan and a 10% down payment:
|Example of LPMI vs. BPMI on a 30-Year Fixed-Rate Mortgage|
|Total monthly payment||$934.03||$945.52|
|Loan balance after 10 years||$104,998.33||$102,147.21|
|Loan balance after 20 years||$61,108.34||$57,678.31|
*Calculated using the LendingTree home loan calculator with PMI, taxes and insurance
Pros and cons of lender-paid mortgage insurance
|Pros and Cons of LPMI|
|Potentially lower monthly payments||Can’t be canceled once you reach 20% equity|
|Tax-deductible||Higher interest rate for the life of the loan|
|Benefits those with high credit scores||Not offered by all lenders|
Alternatives to using LPMI
The best way to determine whether lender-paid PMI is right for you is to consider all your options. Alternatives to LPMI include:
- BPMI. With borrower-paid mortgage insurance, you pay for PMI. The upside of BPMI is that you can cancel PMI once you reach 20% equity.
- Upfront PMI payment. You pay the premium upfront so it doesn’t increase your monthly payment. The downside to paying PMI upfront is that if you sell or refinance your home, you won’t be refunded your premiums.
- Put more than 20% down. You can avoid the PMI issue altogether by making a down payment of more than 20%.
- If eligible, consider a VA loan. VA loans don’t have PMI and typically don’t require a down payment.
- Consider a piggyback loan. With a piggyback loan, a lender offers two home loans. One is a conventional mortgage of 80% of your loan balance, which meets the requirements for not including PMI. The second mortgage is a home equity loan or line of credit to make up the difference between your down payment and your first mortgage balance. Let’s say you had enough to make a 10% down payment. With a piggyback loan, you would have a mortgage for 80% of your loan balance and a second mortgage for 10% of your loan balance. These loans are relatively rare today, and you should look at the numbers closely to decide whether a piggyback loan is a better deal than LPMI.
- Mortgage products that waive PMI. Credit unions, banks and other lenders may offer mortgages without PMI, even with less than 20% as a down payment. Review the terms of these products carefully and compare interest rates and origination fees to make an informed decision.
FAQs about lender-paid mortgage insurance
How does mortgage insurance work?
Mortgage insurance protects lenders if borrowers can’t pay on their mortgage. It makes up the difference if lenders can’t sell a foreclosed home for enough to cover the mortgage balance.
Is PMI included in the mortgage payment?
Like homeowners insurance and property taxes, PMI is included in your monthly mortgage payment. It’s kept in an escrow account and sent to the mortgage insurance provider.
Does PMI go away?
If you have borrower-paid PMI, you can send a written request to your lender for your PMI to be canceled after you gain 20% equity. Your lender automatically cancels it when you reach 22% equity. This doesn’t apply to lender-paid PMI or FHA mortgage insurance. FHA PMI removal is only available if you make a down payment of 10% or more. If your down payment is 10% or more, you can have your FHA mortgage insurance removed after 11 years. If your down payment is less than 10%, you have to pay for mortgage insurance for the entire loan term.
What are lender-paid expenses?
Lender-paid expenses are any fees your lender paid to help you buy your home. These expenses might include legal fees, title insurance and taxes.
What are current LPMI rates?
LPMI rates vary significantly depending on your credit score, the amount of your down payment and the amount of coverage your lender chooses. For example, if you make a 10% down payment, your lender may pay 1.43%-5.87% of your mortgage in PMI costs, and then pass those expenses to you. This doesn’t mean you’re paying 1.43%-5.87% more for your mortgage. Lenders typically pay a single premium for your mortgage insurance, but they pass the interest rate increase to you over the life of the loan. The best way to find current LPMI rates is to contact a lender for a quote specific to your situation.