What is Lender Paid Mortgage Insurance (LPMI)?
There is a popular new home loan product sweeping the country, called lender paid PMI. It's a brilliant loan program in which the mortgage lender pays the mortgage insurance for the borrower in turn a slightly higher interest rate. In many cases, lender paid mortgage insurance can save the homeowner thousands of dollars a year.
Lender Paid Mortgage Insurance vs Private Mortgage Insurance (PMI)
In the past, when you buy a home with less than a 20% down payment, you had to pay for mortgage insurance every month. Mortgage insurance shields the lender in case you do not pay the home loan.
Most people do not like paying for mortgage insurance (PMI), but the reality is that mortgage insurance payments allow millions of Americans to buy a home without 20% or more down. It is possible to buy a home with as little as 3.5% to 5% down these days, as long as you pay for mortgage insurance. There are no PMI loans available and in some cases, you may be eligible for lender paid mortgage insurance.
But we are getting ahead of ourselves. Let's define your mortgage insurance options:
Stop Paying Mortgage Insurance & Let the Lenders Cover Your PMI
In most cases the borrower pays a premium each month on top of your mortgage payment, home owner's insurance and taxes that insures the mortgage against default for the lender. It does cost a little bit extra each month and it will take more budgeting on your part. But if you want to forgo this expense, you may consider lender paid mortgage insurance, or LPMI.
Of course, if you go for LPMI, do not think that you are having the lender make your mortgage payment for you: You still are, it is just that with lender paid PMI, only the structure of the PMI is changing. Instead of paying a set amount each month, you will either fund a lump sum payment up front or you will need to make payments on top of your mortgage every month. Few Americans pay the lump sum for mortgage insurance up front with LPMI; the more common option is to pay a slightly higher interest rate.
If you do decide to make a lump sum payment, the lender will figure out how much is required to cover their costs. But if you decide to pay over the life of the loan with LPMI, you will pay a higher rate.
Things to Think About with Lender Paid PMI and Paying Mortgage Insurance Monthly
Lender paid PMI is not an option for every borrower. It many instances it does take better credit to even be considered for LPMI, and it only is good for certain borrowers:
What Does Mortgage Insurance Cost?
Whether you choose PMI or LPMI, you will need to pay mortgage insurance if you have less than 20% down. The cost of the insurance varies from lender to lender, but it is always based upon the actual cost of the insurance from the mortgage insurance provider. The amount of the insurance premium per year is based upon the following:
The premium for PMI can range from .2% to more than 1% of the amount of the loan per year, usually paid in installments each month. For instance, a $200,000 home loan with a premium rate of .5% would cost you around $80 per month.
Note that PMI rates are heavily based upon your FICO score. If you have a 640 FICO, you will pay $300 per month for mortgage insurance in the above example. For a 740 FICO, the cost would be only $100 per month.
If you have poor credit, an FHA loan is your best option because mortgage insurance for these government loans does not rise based upon poor credit.
Which Is Best?
This depends upon many factors mentioned here, but the lowest risk option is the regular PMI option with monthly payments. If you sell the home in two years, you will not be out the up-front mortgage insurance payment. And if you stay in the house for years, you also will not be paying a higher rate for decades with LPMI.