When you buy a home with less than a 20% down payment, mortgage insurance protects the lender if you default on your loan. One option to pay for this insurance is Lender-Paid Mortgage Insurance (LPMI). With LPMI, the lender pays the insurance premium upfront and recovers this cost by charging you a slightly higher interest rate on your mortgage. This means you don’t pay a separate monthly PMI fee, lowering your monthly payment but increasing the amount of interest paid over time.
Think of it as bundling costs into your mortgage interest rate rather than paying an extra monthly fee. While LPMI lowers your initial monthly payments and can improve your loan qualification by reducing your debt-to-income ratio, it comes with a permanent higher interest rate for the life of the loan unless you refinance.
LPMI differs from traditional Borrower-Paid Mortgage Insurance (BPMI), where you pay a monthly insurance premium separately. BPMI can be canceled automatically once you reach 22% home equity, reducing your monthly payment. In contrast, LPMI stays for the entire loan term, and you can only remove it by refinancing or selling your home.
For a detailed comparison, consider this example:
- With traditional PMI (BPMI), you pay a lower interest rate (e.g., 6.0%) plus a monthly PMI fee (e.g., $180), leading to higher total monthly payments.
- With LPMI, your interest rate is higher (e.g., 6.375%) but you skip the PMI fee, resulting in lower monthly payments initially.
This often makes LPMI attractive for buyers who want to keep monthly costs low or plan to sell or refinance within a few years. However, if you plan to stay long-term and build equity, BPMI might save money since PMI can be canceled.
LPMI is primarily available on conventional loans. Government-backed loans like FHA or VA loans have different mortgage insurance or funding fee structures.
Common misconceptions about LPMI include thinking it’s free insurance or that it can be canceled once equity increases. In reality, the cost is built into your interest rate, and removal requires refinancing or selling.
For more on related topics, see our glossary entries on Private Mortgage Insurance (PMI) and Mortgage Refinance.
According to the Consumer Financial Protection Bureau, understanding these distinctions can help you choose the best mortgage insurance option based on your financial goals and how long you intend to keep your home.
For authoritative guidance on mortgage insurance and loan options, refer to the Consumer Financial Protection Bureau’s guide on Private Mortgage Insurance.