Lender-paid mortgage insurance (LPMI): What is it and how does it work?

When you apply for a mortgage, the gold standard is a down payment of at least 20 percent of the purchase price. However, 20 percent isn’t a magic number, and the reality is that many borrowers put down less — or even nothing. A down payment lower than 20 percent typically requires some form of private mortgage insurance, or PMI. One of those options is lender-paid mortgage insurance, commonly known as LPMI.

What is lender-paid mortgage insurance?

LPMI, or lender-paid mortgage insurance, describes an arrangement where your mortgage lender covers the cost of your mortgage insurance.

While there are other options to pay for mortgage insurance — the most common is a monthly premium tacked onto your monthly mortgage payment — lender-paid mortgage insurance builds the cost of covering your insurance into the mortgage rate. In essence, you’ll pay a higher interest rate.

How does LPMI work?

To cover LPMI, a lender might charge you a higher interest rate to compensate for the higher risk of your lower down payment. Or it might charge you a higher interest rate and buy a single-premium mortgage insurance policy on your behalf.

For instance, a lender may add a quarter of a percentage point to your loan rate, increasing it from 6 to 6.25 percent. On a mortgage with a principal of $100,000 that would represent an additional $16 per month on your mortgage payment. You wouldn’t see it as a separate charge: Your monthly payment would simply be that amount higher.

How much does lender-paid mortgage insurance cost?

The cost of your lender-paid PMI will be expressed as an interest rate percentage, such as an additional 0.25 percent.

How high that percentage increase will be depends on a few factors, most importantly, your credit score and down payment size. As with all loans, the higher your score and down payment, the lower your costs will likely be.

For example, a lender might charge you an additional 0.25 percent if you can put 10 percent down. If you can only manage a 5 percent down payment, you’re a bigger risk, and your LPMI might be as much as 0.5 percent higher.

Your interest rate and costs will be higher than they would be without LPMI, but you won’t be paying monthly mortgage insurance premiums, so your total payment might be cheaper.

Pros and cons of LPMI

To help you decide if lender-paid mortgage insurance is your best bet, or if you should look at increasing your down payment or paying for PMI in a different way, consider these things:

Pros of LPMI

Benefits of having your mortgage lender cover your mortgage insurance include:

• Potential savings. The extra mortgage interest LPMI lenders charge might be less than a comparable monthly mortgage insurance premium.
• Tax benefits. If you itemize your deductions on your tax returns, you can deduct the cost of the increased interest lenders charge you for covering LPMI through the mortgage interest deduction.
• Your monthly payment might be more affordable. That’s because the cost of the mortgage insurance is spread out over the entire loan term.

LPMI only makes sense if it costs you less than monthly PMI. You need to run the numbers (or have your loan officer do it for you) to decide.

Cons of LPMI

While there can be some upsides to LPMI, it’s important to understand the potential drawbacks, too:

• A higher rate that never goes down – LPMI involves a higher interest rate built into the loan. Unless you plan to refinance, that rate won’t ever drop, even after your balance falls below 80 percent.
• You can’t get rid of LPMI – With conventional loans, you can typically request to have traditional PMI removed once you achieve 20 percent equity in your home. But because the cost of LPMI is baked into your interest rate, you can only stop paying for it by refinancing to a new loan.
• Potential for higher overall costs — Because you pay the higher interest rate for the life of the loan, your total costs could be higher with LPMI than with monthly borrower-paid PMI (BMPI).

LPMI vs. PMI

As you weigh the pros and cons of LPMI, calculate the monthly principal and interest (P&I) with and without LPMI. For LPMI, a 0.25 percent rate increase is common when borrowers have excellent credit, but your actual rate depends on the lender you choose and your current financial situation. Compare several offers when shopping for traditional PMI and LPMI home loans.

Here’s how you might look at a PMI vs. LPMI loan for a $300,000 home with a down payment of 10 percent:

With LPMI, you would pay $45 more per month.

Next, ask your lender for a monthly mortgage insurance quote. This quote will depend mainly on two factors: your credit score and down payment. To get a ballpark idea, you can use these estimates from Freddie Mac for a range of monthly PMI premiums on a $300,000 30-year loan with a 7 percent interest rate:

• 15 percent down: $71
• 10 percent down: $176
• 5 percent down: $274

If you’re just considering the difference in monthly payments, LPMI offers an advantage in this case. With a 10 percent down payment, you’ll pay only $45 more each month for your higher-rate mortgage compared to $176 for PMI premiums.

The monthly payment difference isn’t the only factor, however.

Once your loan-to-value (LTV) ratio drops to 80 percent, you can contact your mortgage lender or servicer and request to cancel borrower-paid mortgage insurance. By law, your lender must remove it halfway through your loan term or once your mortgage balance drops to 78 percent of your home’s purchase price.

In addition, if home values are increasing in your area or you increase your home’s value through renovations, you might be able to get your property reappraised for a higher value. If doing so helps you achieve the magic 20 percent home equity figure or the 78 percent LTV ratio, you could cancel your PMI earlier.

With LPMI, there’s no cancellation timetable — it’s simply part of the loan.

Should I get lender-paid mortgage insurance?

Lender-paid mortgage insurance makes sense for some borrowers, but it’s not always the best route.

LPMI can benefit a borrower who:

• Cannot make a substantial down payment on a home
• Needs to keep monthly payments as low as possible
• Is likely to sell their home before their mortgage insurance would automatically cancel

LPMI may not be best for borrowers who:

• Think they’ll stay in their home for most of the mortgage’s term
• Plan to prepay their mortgage
• Live in an area where home values grow quickly (making it easier to reach the PMI cancellation point)

Alternatives to LPMI

There are many ways to get a mortgage with less than 20 percent down, and lender-paid mortgage insurance is just one of them.

• Consider a veteran’s mortgage if you’re eligible. VA loans for active or retired military service members and eligible family members carry no mortgage insurance. However, they do include a funding fee that functions similarly to a single-premium mortgage insurance policy.
• Take out a second mortgage. You might be able to avoid PMI and lower your monthly payment with what’s known as a piggy-back mortgage. This means you take out two mortgages: say, one for 80 percent of the home’s price and another for 10 percent (and you make a 10 percent down payment). This avoids PMI altogether, but it also comes with two mortgages that both charge you interest.
• Pay it all upfront. There might be an option to pay single-premium mortgage insurance, which lumps your entire mortgage insurance coverage into one payment. This can save you money, but it means that you’ll need to hand over a large sum at closing.

Lender-paid mortgage insurance FAQ

• How does LPMI impact the process of refinancing a mortgage?

  Because the cost of LPMI is baked into your interest rate, you can only stop paying for it by refinancing to a new loan, which involves paying closing costs. However, this can make refinancing more attractive — by ditching LPMI, you can get a lower mortgage rate than you have with LPMI. However, it’s probably not enough savings to offset the sharp rise in mortgage and refinance rates, since 2022.
  

• What are the tax implications of LPMI?

  If you itemize deductions on your tax return, you can deduct the cost of the increased interest lenders charge you for covering LPMI through the mortgage interest deduction.
  

• What are some financial assistance programs available for homebuyers looking to avoid PMI or LPMI?

  Homebuyers use a variety of methods to cobble together down payments, including borrowing from friends and family or from retirement accounts. One step that can help is looking into down payment assistance — every state has a housing finance agency that offers support to first-time homebuyers.
  

Additional reporting by Lara Vukelich