What Is Lender-Paid Mortgage Insurance?

A home is one of the largest purchases most people will ever make and signing a mortgage is one of life’s biggest commitments. Before signing, you must understand and carefully consider every decision about the property and mortgage. 

You need a 20% down payment to qualify for a conventional mortgage. Many lenders will accept a lower down payment but only if you have mortgage insurance. LPMI may seem like a good idea because you cover the cost by accepting an increased interest rate rather than paying a monthly premium. Still, there are reasons you should consider the alternatives. Here’s all you need to know about LPMI. 

What is Lender-Paid Mortgage Insurance?

LPMI is mortgage insurance that covers the risk of default. The lender pays upfront and charges the borrower an increased interest rate to cover the insurance cost. LPMI is often a requirement when the borrower does not have the 20% down payment needed to qualify for a conventional mortgage. 

How Does LPMI Work?

The lender usually covers the cost of the LPMI, which is then built into the interest rate. If you don’t have the 20% down payment, you will, in effect, pay a slightly higher interest rate than a borrower who has the full down payment. The size of the rate increase will depend on your creditworthiness and the size of your down payment. The bigger your down payment is and the higher your credit score, the lower the rate you will pay. 

Your mortgage payments are higher, but you don’t have to pay monthly insurance premiums. 

What’s the Difference Between LMPI and PMI?

Private Mortgage Insurance (PMI) and LPMI are similar in that both cover the risk to the lender when the borrower doesn’t have the 20% down payment. The difference lies in who pays the premium and the effect on the mortgage over time. 

The lender pays the LMPI, increasing the mortgage interest rate to cover the cost. With a PMI, the borrower must pay the monthly premium and repay the mortgage. You may benefit from lower monthly payments if you have an LMPI, but this is factored into your mortgage repayments. 

You can’t cancel an LPMI during the mortgage term, but you can cancel a PMI once you have built enough equity in your home. Contact the lender when you have 20% equity. By law, the borrower must cancel the insurance when they own 78% of the property value. 

How Much Does Lender-Paid Mortgage Insurance Cost?

Unlike a PMI, with an LMPI, no monthly insurance payments are due. Instead, the LPMI premium, paid upfront by the seller, is added to the interest rate and becomes part of your monthly mortgage repayment. The result may be that you pay more for the insurance over the mortgage term than you would have paid if you’d opted for an LMI. 

Compare the mortgage repayments with and without the LPMI over the mortgage term. Then weigh the costs against the total premiums on the LMI to see which will cost more. Use an online mortgage calculator to compare costs. 

Pros and Cons of Lender-Paid Mortgage Insurance Cost?

An LPMI may be tempting if you can’t finance the 20% down payment. You must, however, consider the pros and cons before signing the agreement. These include: 

Pros

For some borrowers, LPMI's advantages outweigh the disadvantages. 

• Lower monthly payments: The monthly mortgage increase may be lower than paying a separate insurance premium on an LMI. 
• Lower down payment: Buyers are often keen to invest in property sooner rather than later. With mortgage insurance, you could qualify for a loan before you have the 20% you need as a down payment. 
• Quick and easy: The lender pays the premium, so you don’t have any extra administration to qualify. 

Cons

LPMI also has some serious disadvantages to consider. 

• Higher interest rate: You pay a higher interest rate than you would pay if you had the 20% down payment. 
• No cancellation: You will pay a higher interest rate for the full mortgage term. You usually cannot cancel an LPMI, as you can a PMI. 
• Possible higher overall cost: Depending on the mortgage term, you may end up paying more than you would if you had opted for a PMI. 

How to Get Rid of LPMI

You can cancel a PMI when you have enough home equity, but with an LPMI, you’re in for the long haul. You cannot cancel the insurance for the full mortgage term. You only have two options if you’re determined to eliminate your LPMI.

• Refinance your mortgage: You could take out a new mortgage with a lower loan-to-value ratio, so you don’t need mortgage insurance.
• Interest rate considerations: The interest rate on the mortgage must cover the closing costs of a new mortgage.
• Eligibility: The new lender will consider your credit score, debt-to-income ratio and home equity before granting the mortgage. 
• Sell your house: If you have enough home equity, you could sell your home and pay off the mortgage. Then, use the sale proceeds for a down payment on a new property. 

Alternatives to LPMI

You don’t have to settle for an LPMI. There are several alternatives you could use instead. 

Choose a Borrower-Paid Mortgage Insurance 

Sign up for borrower-paid mortgage insurance. You can cancel when you reach the required equity threshold of 20% to 22% and avoid further premiums. 

Save for a Larger Down Payment 

Consider renting accommodation until you save enough for a 20% down payment. This way you can qualify for a mortgage without mortgage insurance. 

Apply for a Financial-Assistance Program 

Veteran’s Association (VA) and Federal Housing Administration (FHA) loan programs allow smaller down payments. VA loans have 0 down payment requirements and FHA of as little as 3.5%. You will pay mortgage insurance, but you will pay much lower premiums. FHA and VA loans have their own mortgage insurance. 

Take Out a Second Mortgage

Take out a smaller second mortgage to cover the down payment shortfall. A second mortgage often has a lower interest rate than the primary mortgage, and the monthly mortgage repayments may be lower than the PMI premiums. 

Find a Mortgage Without a PMI Requirement 

Look for lenders willing to accept a lower down payment without a PMI. Do your research, shop around and compare costs. 

Compare the Best Mortgage Options from Benzinga’s Top Lenders

Looking for a mortgage? You’ll find some of the best alternatives in the chart below. 

Consider the Alternatives Before Committing to an LPMI

An LPMI may be a tempting alternative to PMI. Still, before you settle for the increased interest rate, you must weigh the pros and cons. Calculate the overall cost of an LPMI and a PMI, bearing in mind you can cancel the PMI once you’ve gained enough home equity. A mortgage is a serious financial commitment. Seek advice financial advice before you take the plunge.

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