Quick snapshot
- What you pay: PMI is a separate monthly or annual premium paid by the borrower. LPMI is built into a higher interest rate and paid via the loan interest over the life of the mortgage.
- Removal: Borrower-paid PMI can usually be cancelled once you reach sufficient equity (see rules below). LPMI is permanent for the life of the loan unless you refinance.
- Best for: PMI often works for short-term owners planning to build equity quickly; LPMI can make sense for buyers prioritizing lower initial monthly bills or who expect to keep the loan long-term and won’t meet the cancellation triggers.
Why the difference matters
Choosing PMI or LPMI changes more than how a line shows up on your statement. It affects: cash needed at closing, the monthly payment today, the total interest you pay over the life of the loan, and how (or whether) you can eliminate the insurance later. In my experience advising first-time buyers and repeat purchasers, small percentage-point differences in rate or a few hundred dollars in monthly PMI can change the right strategy depending on how long someone expects to stay in the home.
Authoritative sources: the Consumer Financial Protection Bureau explains PMI basics and cancellation rights (Consumer Financial Protection Bureau, consumerfinance.gov), and the Homeowners Protection Act (federal law) requires certain cancellation and disclosure rules for borrower-paid PMI (U.S. Department of Housing and Urban Development, hud.gov).
How each option works (practical mechanics)
PMI (Private Mortgage Insurance)
- Structure: Borrower purchases insurance that protects the lender. Payments can be monthly, annual, or a single upfront premium depending on the product.
- Cost Drivers: Loan-to-value (LTV), credit score, loan type, and insurer pricing. Typical conventional-PMI rates often range from 0.3% to 1.5% of loan amount annually (varies by risk factors and market conditions).
- Removal: Under the Homeowners Protection Act (HPA), borrowers can request cancellation when the original principal balance reaches 80% of the original value; lenders must automatically terminate borrower-paid PMI when the balance reaches 78% (subject to timely payments and loan type). Requirements differ if you refinance, make improvements, or your appraisal changes (HUD; CFPB).
LPMI (Lender-Paid Mortgage Insurance)
- Structure: The lender pays the mortgage insurance premium up front or as part of their costs and offsets that with a higher interest rate charged to you. There is no separate PMI line item.
- Cost Drivers: The lender typically adds a rate margin that reflects the cost of insurance plus profit. That higher rate increases interest expense for the life of the loan.
- Removal: LPMI cannot be cancelled separately because the insurance is effectively paid through the rate; the practical way to remove it is to refinance to a loan without LPMI (or to a conventional loan if you’ve built 20%+ equity and can qualify for standard pricing).
Concrete examples (numbers you can model)
Example A — PMI (borrower-paid)
- Loan: $300,000 purchase, 10% down ($30,000 down; $270,000 loan)
- PMI rate: 0.7% annually on the unpaid principal balance (typical mid-range)
- Annual PMI: $270,000 × 0.007 = $1,890 → $157.50/month
Example B — LPMI (lender-paid)
- Same $270,000 loan, but lender adds 0.25–0.50 percentage point to the interest rate to cover insurance costs (e.g., 3.50% → 3.75%).
- That rate bump increases monthly principal and interest payments and the total interest paid over the loan term. Over 30 years, that extra 0.25% could add several thousand dollars in interest versus the lower-rate PMI option — though you won’t see a separate PMI line.
Break-even considerations
- Time in home: If you expect to sell or refinance before your loan balance reaches a level where borrower-paid PMI would be removed (or before you recoup the higher interest from LPMI), PMI might be cheaper in total. If you expect to stay long-term or expect slow principal paydown (interest-only, long amortization), LPMI may be more attractive because the nominal monthly payment can be lower initially.
- Taxes: Mortgage insurance premiums were previously tax-deductible for some taxpayers but rules have changed repeatedly. Check with the IRS or a tax advisor for current deductibility rules (IRS guidance).
When PMI is usually the better choice
- You plan to stay in the home short-to-medium term (typically under 5–7 years) and will reach 20% equity quickly through scheduled amortization or extra principal payments.
- You prefer transparency: you want the insurance payment visible and removable without refinancing.
- You have a larger down payment but still under 20% and can shop for the best PMI rate.
When LPMI is usually the better choice
- You want the lowest possible monthly payment and can accept a slightly higher interest rate.
- You expect to keep the loan long-term (the rate premium compounds for as long as the loan exists).
- You don’t want to worry about managing a separate PMI cancellation process and are comfortable refinancing later if you want the insurance removed.
Removal and refinance strategies
- PMI removal: After you reach 80% LTV based on the original value, you can request cancellation under the HPA; when you reach 78% lenders must cancel on qualifying loans (see CFPB and HUD guidance). Keep records and request a written payoff history and appraisal if needed.
- Removing LPMI: Your feasible paths are to refinance into a new loan without LPMI or to refinance into a conventional loan if your equity has grown to 20%+. Calculate refinance closing costs and the interest-rate environment before deciding.
Related glossary reading: see our articles on Mortgage Insurance Cancellation: How and When You Can Remove PMI and the basic primer on Lender-Paid Mortgage Insurance (LPMI).
Common misconceptions and pitfalls
- “LPMI is always cheaper.” Not necessarily — the rate premium raises interest costs for the full loan term. If you expect to build equity or refinance later, borrower-paid PMI could be cheaper.
- “PMI will always be removed at 20% market value.” Cancellation rights are typically tied to the original value and to timely payments; lenders may require an appraisal or meet other conditions (Homeowners Protection Act rules).
- “LPMI only for bad credit borrowers.” Lenders offer LPMI to many borrowers; whether it’s offered depends on lender economics and market offerings, not only credit score.
How to decide — a short decision checklist
- How long do you plan to keep the home? (Short → consider borrower-paid PMI; long → consider LPMI if you want lower monthly visibility.)
- Can you make extra principal payments? (If yes, PMI removal may come faster, favoring borrower-paid PMI.)
- What are the lender’s specific PMI rates and the LPMI rate bump? (Get both written and run a 3–5 year and lifetime cost comparison.)
- Will you qualify to refinance later if needed? (If not, LPMI may lock you into higher costs.)
Practical tips from my experience
- Ask lenders for both scenarios in writing: (a) borrower-paid PMI with its monthly premium, and (b) LPMI with the interest rate and projected payments. Compare total costs over the horizon you expect to hold the loan.
- Shop multiple lenders. PMI pricing and LPMI rate adjustments vary and small differences can change your preferred option.
- Request the PMI cancellation policy in writing. Some lenders are stricter than federal minimums.
- If you plan to accelerate principal payments, simulate payoff schedules and PMI-cancellation dates.
Final notes and disclaimer
This article is educational and does not replace personalized advice. Mortgage product offerings and tax rules change; confirm current PMI rules with the Consumer Financial Protection Bureau (https://www.consumerfinance.gov/) and read lender disclosures carefully. For decisions that materially affect your finances, consult a mortgage professional or financial advisor.
Author credit: Senior Financial Content Editor, FinHelp.io — based on industry guidelines and client experience. Useful internal reading: Private Mortgage Insurance (PMI) and Mortgage Insurance Options: When PMI Is Avoidable.
Authoritative references
- Consumer Financial Protection Bureau — guide to PMI and cancellation rules (consumerfinance.gov).
- U.S. Department of Housing and Urban Development — Homeowners Protection Act guidance (hud.gov).
- Fannie Mae selling and servicing guides for conventional loan mortgage insurance rules (fanniemae.com).
