What Is Lender-Paid Mortgage Insurance?
If you don’t have 20% for a down payment on a home, you generally have to pay for private mortgage insurance (PMI), which can raise your monthly payments. Another option is lender-paid mortgage insurance (LPMI), which doesn’t increase your mortgage payments as much as traditional PMI. However, despite having “lender paid” in the name, you’ll still pay for LPMI through a higher mortgage interest rate.
Key takeaways
- Lender-paid mortgage insurance means the lender, not the borrower, pays the mortgage insurance costs.
- In return, the lender charges a higher interest rate on your home loan.
- You can’t cancel lender-paid mortgage insurance — it exists for the life of your loan, unless you refinance.
How does lender-paid mortgage insurance work?
Lender-paid mortgage insurance (LPMI), also called lender-paid private mortgage insurance, is an option to keep your monthly payments affordable if you can’t make a large down payment. LPMI allows you to buy a home with less than 20% down and protects the lender if you default on your loan.
While LPMI won’t increase your monthly payment as much as private mortgage insurance (PMI), it will increase your mortgage rate. The amount by which your rate increases can depend on several factors, including your credit score and down payment amount. Here’s an example:
| Interest rate without LPMI | 6.98% |
| Interest rate with LPMI and a 10% down payment | 7.23% |
| Interest rate with LPMI and a 3% down payment | 7.48% |
LPMI vs. PMI
Private mortgage insurance (PMI) is a monthly charge that is added to your mortgage payment and typically costs between $30 and $70 a month for every $100,000 you borrow. You can request a PMI cancellation once you have at least 20% equity in your home. Otherwise, your PMI automatically terminates once you’re halfway through your loan term or you’ve made enough payments to build 22% equity. LPMI generally has a much lower monthly cost but lasts for the life of your loan.
Should you get lender-paid mortgage insurance?
Here are some situations where lender-paid mortgage insurance may be advantageous to homebuyers:
You plan to live in your home for a short period of time. If you plan to only live in your new home for a few years before selling it, you likely won’t get near the 20% equity mark you’d need to drop the monthly PMI.
You earn a high income. Mortgage interest is deductible on your federal taxes, therefore a higher mortgage rate may be especially appealing to high-income earners.
You want to keep your monthly payments as low as possible. Since LPMI is spread out over the life of your mortgage, it can mean lower monthly mortgage payments.
Pros and cons of lender-paid mortgage insurance
| Pros | Cons |
|---|---|
| Your monthly payment may be lower. Your monthly mortgage payment might be more affordable, since LPMI is spread out over the loan term. You could qualify for a larger mortgage. A lower monthly payment may help you qualify for a bigger loan if it reduces your debt-to-income ratio. You might save on taxes. Having LPMI could result in a greater federal tax savings if you deduct home mortgage interest costs. | You may have higher total loan costs. LPMI will likely be more expensive than PMI in the long run. You can’t get rid of LPMI. You can’t remove LPMI regardless of how much equity you build. You can’t get it through every lender. LPMI is only offered through select lenders. |
Lender-paid mortgage insurance disclosure requirements
When you get a loan with lender-paid mortgage insurance, the lender must provide a written notice with various information, including:
- The differences between lender-paid and borrower-paid mortgage insurance, including the benefits and drawbacks of each option.
- That the only way to get rid of lender-paid mortgage insurance is to refinance or pay off your loan.
- That lender-paid mortgage insurance usually results in a higher mortgage rate than with borrower-paid mortgage insurance.
How to get out of lender-paid mortgage insurance
Because the cost of LPMI is woven into your mortgage interest rate, you need to refinance or pay off your mortgage to get rid of it. If you refinance and don’t have 20% equity in your house yet — maybe because of a cash-out refinance — you’ll still need to pay mortgage insurance on your new home loan.
Ready to compare refinance offers? Get Your Best Rates from Top Lenders TodayAlternatives to lender-paid mortgage insurance
Find a mortgage without a PMI requirement
You may see lenders advertise special loan programs that don’t include a mortgage insurance requirement. Depending on your credit score and the home you’re buying, you may be able to find a mortgage that doesn’t require PMI. For example, VA loans don’t require mortgage insurance, though they do have a funding fee.
Make a bigger down payment
If you make a 20% down payment, you won’t need LPMI at all. If you don’t quite have enough cash, you can still make a larger down payment and choose to pay monthly PMI. The less money you borrow, the less you’ll pay in mortgage insurance.
Pay for monthly mortgage insurance
You could opt for borrower-paid mortgage insurance (BPMI), which is another term for PMI.
Use a financial assistance program
There are tons of financial assistance programs available for homebuyers. Here’s a short list:
- Down payment assistance
- First-time homebuyer programs
- Federal Housing Administration (such as FHA loans)
- U.S. Department of Veterans Affairs (such as VA loans)
- U.S. Department of Agriculture (like USDA loans)
- Assistance programs for teachers and other public servants
Get a second mortgage
You could get a second home loan, or a second mortgage, to fund a 20% down payment. The downside: You’ll have a second monthly payment. To see if this is a smart option, compare the cost of a second mortgage to that of LPMI or PMI.