Halfpoint Images/ Getty Images; Illustration by Austin Courregé/Bankrate
Key takeaways
- With lender-paid mortgage insurance (LPMI), the lender covers the cost of mortgage insurance.
- Lenders recoup the cost of LPMI by charging a slightly higher interest rate on the loan.
- LPMI typically costs less than private mortgage insurance (PMI) on a monthly basis, but it may cost more over the life of the loan.
What is lender-paid mortgage insurance?
Lender-paid mortgage insurance (LPMI) is an option in which the lender covers the cost of mortgage insurance on a home loan.
Mortgage insurance protects your lender in case you default on your mortgage. It’s generally required for borrowers who make less than a 20 percent down payment — which is the case for most homebuyers.
How does LPMI work?
Unlike borrower-paid private mortgage insurance (PMI), which is a part of borrowers’ monthly mortgage payments, LPMI isn’t a separate line item on your monthly bill — but it’s not free. Lenders fund it by charging a higher interest rate on the mortgage loan.
Lenders then use the extra money to either offset their risk or buy a mortgage insurance policy for you.
How much does lender-paid mortgage insurance cost?
The cost you’ll pay for LPMI depends largely on your lender, the size of your down payment and your credit score. If you make a larger down payment — say 10 percent — and have a higher credit score, you may pay as little as a quarter-point more in interest, for example, 6.5 percent versus 6.75 percent. If you have a lower down payment and a lower credit score, you’ll likely pay more.
If your lender raised your interest rate from 6.5 to 6.75 percent on a $400,000 loan, this would increase your principal and interest payment from $2,528.27 to $2,594.39, or about $66 per month.
To determine the cost of LPMI in your specific situation, get a quote with and without it.
Pros and cons of lender-paid PMI
To weigh LPMI against paying for PMI another way or trying to increase your down payment, consider the benefits and drawbacks.
Pros
- Short- and medium-term savings. The cost of paying a higher interest rate will likely be lower than the monthly cost of PMI on the same loan.
- Tax benefits. If you itemize at tax time, you can typically deduct your mortgage interest — including the cost of LPMI — through the mortgage interest deduction. Borrower-paid PMI is no longer tax-deductible as of the 2021 tax year.
Cons
- Higher interest rate. In exchange for LPMI, you’ll pay a higher rate for the life of your loan, which increases your overall cost of borrowing.
- Remains for the life of the loan. Unlike PMI, which can be cancelled once your loan-to-value (LTV) ratio reaches 80 percent, you’ll pay LPMI — in the form of a higher rate — until you pay the loan off or refinance.
- Limited availability. Some lenders don’t offer LPMI. If you know you want it, make sure to ask lenders if they offer it and if you might qualify.
LPMI vs. PMI
Choosing between LPMI and PMI ultimately comes down to cost. You’ll want to calculate your monthly principal and interest payment with PMI and LPMI, as well as how much you’ll pay over your loan term with each method. Compare several lenders to lower your expenses. Keep in mind that you’ll be able to cancel borrower-paid mortgage insurance at some point in your loan term.
With LPMI, if you have excellent credit, you’ll often pay a quarter-point more in interest. In the example above, that’s about $66 per month. On the other hand, for the same loan, you could expect to pay an extra $365 per month in PMI, according to estimates by Freddie Mac. This cost would last for about nine years of the loan.
Here’s how PMI and LPMI impact the cost of that $400,000 loan.
| Monthly payment (PMI) | Total paid (PMI) | Monthly payment (LPMI) | Total paid (LPMI) | |
|---|---|---|---|---|
| Origination |
$2,893.27 |
$0 |
$2,594.39 |
$0 |
| Year 15 |
$2,528.27 |
$497,038 |
$2,594.39 |
$469,585 |
| Year 30 | $0 |
$949,598 |
$0 |
$933,981 |
In this case, LPMI is the way to go, both in terms of short- and long-term costs. The math could shift, however, if you pay more for LPMI or less for PMI. This may be the case if you can get rid of PMI sooner than scheduled — for example, by prepaying your mortgage or getting a reappraisal if you suspect your home has increased in value.
Bankrate’s take:
As you weigh buyer-paid PMI vs. LPMI, think long-term. With buyer-paid PMI, the ability to drop those PMI payments once you accrue enough equity in your home may make the added costs worthwhile if you can get rid of PMI relatively early in your loan term.
Should I get lender-paid mortgage insurance?
Taking out a loan with LPMI may get you into a home faster, but it won’t make sense for every borrower.
LPMI may benefit borrowers who:
- Will likely sell the home before reaching the threshold for cancellation on borrower-paid mortgage insurance
- Need monthly payments to be as low as possible
LPMI may not be best for borrowers who:
- Expect to prepay their mortgage by putting extra toward their loan principal each month, especially early in the loan term
- Live in an area where home values grow quickly, making it easier to reach the PMI cancellation threshold
Alternatives to LPMI
Pay your mortgage insurance upfront. This will lower your monthly payments, but you’ll need to pay much more at closing.
Take out a second mortgage. You can avoid LPMI — and PMI — by borrowing two mortgages, sometimes referred to as a piggy-back mortgage. You’ll make a 10 percent down payment, borrow one loan to cover 80 percent of the property cost, and a second loan to cover an additional 10 percent for a down payment. This way, you won’t pay PMI, but you will have two mortgages that both charge interest — so be sure to do the math if you’re considering this option. You’ll also want to ensure that the lender of your primary mortgage allows this approach.
Consider another mortgage product. If you qualify for a VA loan, you may not need to worry about a down payment or mortgage insurance, though a funding fee may apply. Alternatively, some lenders offer proprietary loan products that allow for a low down payment, some of which may not require borrower-paid PMI.
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