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LPMI vs. PMI: Is Lender-Paid Private Mortgage Insurance Right For you?
Private Mortgage Insurance (PMI) is required with conventional mortgage loans when you put down less than 20 percent on your home purchase. PMI helps lenders mitigate risk to offer low-down payment purchase financing and is why three percent down payment programs exist.
PMI is traditionally paid monthly. While it adds a small premium to your monthly payments, it doesn’t last forever. You can cancel these premiums once you have enough equity in your home.
An alternative to monthly PMI payments is lender-paid private mortgage insurance (LPMI). With LPMI, your lender handles the mortgage insurance payments. However, this is not a no-cost option and typically results in a higher interest rate.
Read on to learn more about LPMI vs. PMI or apply to get pre-approved for your mortgage loan now.
What is LPMI?
Lender-paid private mortgage insurance (LPMI) is a type of PMI that is arranged and paid for by your mortgage lender. You’ll typically pay for this service with a higher interest rate.
With lender-paid private mortgage insurance, your mortgage insurance is either built into the closing costs or paid via a higher interest rate.
Lenders can negotiate lower premiums in bulk than a home buyer could on a single PMI policy, so LPMI is often cheaper than monthly PMI payments. However, LPMI policies cannot be canceled. You must pay off the loan or refinance to drop the insurance — and the higher rate it comes with.
LPMI often results in a lower monthly payment, though it may cost more in the long run.
What is PMI?
Private mortgage insurance (PMI) is a type of insurance policy that mitigates the lender’s risk, allowing them to offer low-down-payment purchase financing.
Private Mortgage Insurance is a type of insurance required on conventional loans when you put down less than 20 percent on a home purchase. The home buyer pays the monthly premium, and the insurance reduces the lender’s risk to provide purchase financing with as little as 3 percent down.
Four Types of PMI
There are four ways to pay for Private Mortgage Insurance. Your options will typically depend on what your lender offers.
Private Mortgage Insurance can be purchased as:
- Borrower-paid monthly PMI — Default monthly PMI option that can be cancelled when you build 20 percent home equity.
- Borrower-paid single-premium PMI — Allows the buyer to pay the insurance premium up-front and is non-refundable.
- Borrower-paid split-premium PMI — Buyer pays a portion of the premium up-front and a reduced monthly payment.
- Lender-paid PMI — Lender-arranged PMI that is via an increased interest rate and cannot be canceled.
LPMI vs. PMI: The Main Differences
How is this policy paid?
|Via an increased interest rate.||Via a monthly premium added to your mortgage payments.|
Can this policy be canceled?
|No.||Yes, once your home equity reaches 20%.|
Is this policy tax-deductible?
|Yes, if you itemize your returns.||Maybe. PMI was deductible in 2020, but the policy has yet to be extended for the 2021 tax year.|
Is the home buyer responsible for this payment?
The Benefits of Lender-Paid Mortgage Insurance
The most significant benefit of LPMI is that it can yield lower monthly payments than borrower-paid PMI.
LPMI can be a money-saver for short-term homeowners. If you plan to sell before you have 20 percent equity, you can take the short-term savings and not worry about longer-term costs.
Finally, LPMI is fully tax-deductible. LPMI is paid through a higher interest rate. And, when you itemize your returns, mortgage interest is deductible.
The Benefits of Private Mortgage Insurance
Borrower-paid PMI has its benefits, too. For one, it’s more accessible. Every lender has borrower-paid PMI options, but not all offer LPMI.
You can also cancel borrower-paid PMI once you reach 20 percent equity in your home. This is great if you plan to be in your home long-term, and you can look forward to a lower payment once you reach 20 percent equity.
Remember that your equity rises when home values rise, so you may reach 20 percent equity sooner than expected.
Frequently Asked Questions
Is LPMI or PMI better for first-time home buyers?
It depends on how long you plan to stay in the home and what offerings your lender makes available. While LPMI typically gives the lower monthly payment, that’s not always the case. It’s best to work with your trusted mortgage expert to compare all available options.
Which PMI has the lowest risk?
PMI doesn’t lower your risk, so all policies would be the same for you. That said, LPMI can’t be canceled. If you see being tied into PMI as a risk, then a borrower-paid PMI option would be a lower risk for you.
How much does PMI cost?
Which loans require PMI?
Many types of mortgage loans require mortgage insurance:
- Conventional loans with a down payment of less than 20 percent
- FHA loans require a Mortgage Insurance Premium, regardless of the down payment amount
- VA loans require a Guarantee Fee, regardless of the down payment amount
- USDA loans require a Guarantee Fee, regardless of the down payment amount
The bottom line
PMI comes with many benefits and can help you buy your dream home with less money down. If you know you’ll only be in the home for a short while, LPMI can often be the best choice, but if you plan to stay for the long haul, borrower-paid PMI may be a better fit.
Always talk to your mortgage expert about your long-term goals and budget. They can give you all of your options and point you in the right direction. Home buyer education can also provide the tools you need to buy your first home with confidence.
Get pre-approved for a mortgage today.