January 17th, 2017 7:37 PM by Robin Bain
More and more
borrowers today are looking for ways to finance their home purchase without
making a full 20% down payment. As FHA continues to increase fees, many are
turning to private mortgage insurance (PMI) combined with a conventional loan.
To the surprise of
many homebuyers, there is more than one way to obtain PMI. One of those PMI
alternatives is called Lender Paid Mortgage Insurance, or LPMI.
What is Lender
Paid Mortgage Insurance?
Mortgage Insurance is a form of PMI that is paid for by the lender via a
one-time fee, rather than by the borrower monthly. Some form of PMI is required
whenever a borrower puts less than 20% down on a conventional loan.
The term “Lender
Paid Mortgage Insurance” is a bit misleading, however. The lender does not pay
the borrower’s mortgage insurance premium out of the goodness of its heart.
Rather, the lender raises the interest rate on the mortgage to generate enough
profit to pay the mortgage insurance company the required one-time fee.
The party who ends
up paying the cost of LPMI is ultimately the borrower, since it’s the
borrower’s interest rate that is increased. For this reason, LPMI is sometimes
referred to as Single Premium mortgage insurance.
The reason it is
often called “lender paid” is that the borrower is not allowed to pay the
one-time premium directly out of their own funds. The funds must come from the
lender, or from another party, such as the builder or seller.
Some lenders offer
a PMI option where the borrower pays the one-time premium out of their own
funds. This is known as either Borrower Paid Mortgage Insurance, BPMI, or
Borrower Paid Single Premium mortgage insurance. If you want to buy out your
own mortgage insurance to avoid the LPMI rate increase, ask your lender
about their BPMI programs.
How Does LPMI
What’s not readily
apparent to homebuyers is that the higher the interest rate on your mortgage,
the more profit is available to the lender. So, let’s imagine that you accept
an interest rate on your mortgage that is 0.50% higher than market rates. The
rate increase generates an extra $5000 in profit on that loan.
Let’s also imagine
that a PMI company agrees to accept a one-time payment of $5000 in lieu of
receiving a monthly PMI payment from the borrower.
The lender could
opt to take that extra $5000 in profit and essentially prepay the PMI premium.
The borrower ends up with a higher rate, but no monthly mortgage insurance
Is LPMI better
Administration (FHA) loans have been a great tool for homebuyers over the past
few years. If not for FHA, many would be locked out of homeownership. However,
FHA is increasing fees again as of April 1, 2013, to steady its troubled
financial position. LPMI might become a more attractive option.
It’s true that the
interest rate on an LPMI loan would be higher than an FHA loan. But FHA has
very high monthly mortgage insurance costs, and also an upfront fee of 1.75% of
the loan amount. FHA mortgage insurance negates any savings from a lower
Still, FHA may be
a better option for some homebuyers. FHA allows for as little as 3.5% down,
compared to LMPI’s 5% down requirement. FHA also allows for more seller
contributions toward closing costs. Leniency from FHA means a lot less
out-of-pocket expense for FHA borrowers.
borrowers can qualify for an FHA loan with a lower credit score.
As shown in the
chart below, each borrower would have to analyze their available funds, their
monthly payment tolerance, and their credit rating to opt for LPMI or FHA.
Out-Of-Pocket Expense: LPMI vs Monthly PMI vs FHA
option comes out on top? Let’s look at an example of a $250,000 home purchase.
$245,471 (includes 1.75% upfront
Interest Rate & APR
4.0% (APR 4.053%)
3.5% (APR 3.948%)
3.25% (APR 4.798%)
Principle and Interest Monthly
Monthly Taxes and Insurance
Estimated Total Cash Needed to
Close the Loan
LPMI seems to come
out on top based strictly on monthly payment. But that’s not the whole story.
LPMI has its advantages as well as disadvantages depending on other factors.
Ask Yourself: How
Long will I Keep this Mortgage?
Even though the
monthly payment on an LPMI loan might be cheaper initially, it might cost more
than monthly PMI if you keep your loan for 30 years. This is because you can
cancel monthly PMI when your loan reaches 80% Loan-to-Value (LTV), but you
can’t lower your LPMI interest rate at any time without refinancing. Let’s look
at a cost comparison of a person who keeps their mortgage for 10 years and 30
years. All scenarios assume a 5% down payment:
after 10 years
PMI after 10 years
after 30 years
PMI after 30 years
Lifetime MI cost
$1133 x 120 months: $135,960
$1066 x 120 months: $127,920
$1133 x 360 months: $407,880
$1066 x 360 months: $383,760
Total Principle, Interest, and
10 years: $135,960
10 years: $139,721
30 years: $407,880
30 years: $395,561
Should You Choose
The main benefit
to LPMI is simply lower monthly payments at the beginning of the mortgage, when
you’re first starting out on your homeownership journey. It’s also nice to know
that you won’t be seeing that pesky mortgage insurance payment on your
statement each month for the first 7-10 years of your mortgage. It’s a great
program for those who want a low monthly payment and don’t mind a slightly
higher interest rate. Ask your mortgage professional and see if a loan with
Lender Paid Mortgage Insurance is right for you.
All PMI scenarios based on $250,000 purchase price and value, 5% down, 740 credit score. 30 year fixed rate 1st mortgage with principle and interest payment. FHA scenario based on $250,000 purchase price and value, 680 credit score, 3.5% down. Mortgage payments rounded to the nearest dollar.
When can I remove private mortgage insurance (PMI) from my loan?
To remove private mortgage insurance (PMI) that you pay on your mortgage loan, you must be up to date with your monthly payments. These rules apply to mortgages closed on or after July 29, 1999. Federal law generally provides two ways for you to remove PMI from your home loan: canceling PMI or PMI termination.