Looking to purchase a home with less than 20% down payment? Whether you’re eyeing a property in Seattle, WA, or considering a home in Austin, TX, you’ll likely come across mortgage insurance options. While most buyers are familiar with borrower-paid mortgage insurance (BPMI), there’s another alternative your lender might offer: Lender-Paid Mortgage Insurance (LPMI).
LPMI can reduce your monthly payment and eliminate the need for monthly PMI charges, but it does come with long-term trade-offs. This article will explain how LPMI works, compare it to traditional PMI, discuss who it’s best suited for, and help you determine if it’s the right choice for your circumstances.
Understanding Lender-Paid Mortgage Insurance (LPMI)
Lender-Paid Mortgage Insurance (LPMI) is when your lender covers the upfront cost of your mortgage insurance premium, eliminating the need for a monthly PMI payment. In return, the lender adjusts your interest rate to a higher percentage for the duration of the loan.
Essentially, LPMI is integrated into your mortgage rate. While you save on monthly PMI expenses, you end up paying more in interest over the loan term.
How LPMI Works
LPMI can be structured in two main ways:
1. Single-Premium LPMI (Most Common)
The lender pays a one-time upfront PMI premium, and you agree to a slightly higher interest rate.
2. Lender-Financed LPMI
The lender either finances the cost into the loan amount or raises the interest rate further to cover ongoing PMI premiums.
Regardless of the structure, both forms of LPMI result in an increased interest rate to offset the insurance cost. It boils down to a trade-off:
- No monthly PMI expenses
- But a permanently higher mortgage rate
Borrower-Paid PMI (BPMI) Explained
Before delving into the comparison between LPMI and BPMI, it’s essential to understand how traditional PMI operates.
Borrower-Paid PMI (BPMI) is the standard form of mortgage insurance that most buyers opt for when putting down less than 20% on a conventional loan. With BPMI:
- The borrower pays a monthly PMI fee, which is added to the mortgage payment
- The cost varies based on credit score, loan type, and down payment amount
- PMI can be removed later, typically when reaching 20% equity
- It offers lower interest rates as PMI is not included in the rate
BPMI is the type of PMI that most homebuyers encounter—it’s a separate item on the monthly mortgage statement until the loan attains a specific equity threshold. In certain cases, you may be able to request early PMI removal with a new appraisal, depending on your lender’s policies. Once eliminated, you continue paying the same lower interest rate.
LPMI vs. Borrower-Paid PMI (BPMI) Comparison
Here’s how LPMI stacks up against the traditional BPMI option that the majority of buyers encounter:
| Feature | LPMI | BPMI (Traditional PMI) |
| Who pays the premium? | Lender (cost included in your rate) | Borrower (monthly fee) |
| Monthly PMI payment | No | Yes, until 20–22% equity |
| Interest rate | Higher | Lower |
| Ability to remove PMI | No—rate remains higher indefinitely | Yes—can be canceled at 20% equity |
| Beneficial for lower initial payments? | Possibly, based on PMI cost | Dependent on PMI cost |
| Better long-term savings? | Typically no | Usually yes |
In most cases, BPMI proves to be more cost-effective over the loan’s duration, whereas LPMI can be advantageous in the short term if you prioritize monthly affordability.
Example: Comparing LPMI and BPMI Costs
Scenario:
- $450,000 property price
- 5% down payment ($22,500)
- 30-year fixed-rate mortgage
- Buyer has good credit
With BPMI
- Interest rate: 6.5%
- Monthly PMI: $140–$200, depending on credit score
- PMI ceases once you reach ~20% equity (approximately 5–8 years)
With LPMI
- Interest rate: 6.875%
- No monthly PMI
- Higher rate leads to increased interest payments over time
- Inability to eliminate the higher rate
In the initial 2–3 years, the LPMI option may marginally reduce monthly expenses, depending on your PMI rate. Over the loan’s lifespan, BPMI usually proves to be the better financial choice.
Utilize Redfin’s mortgage calculator to estimate the impact of PMI on your monthly payments and compare it with a scenario involving a higher interest rate.
Pros and Cons of LPMI
Pros
- No monthly PMI payment—reduces your initial housing costs
- Potentially lower monthly payment compared to a loan with BPMI
- May aid in easier qualification due to a smaller monthly debt burden
- Simplified payment structure with all expenses rolled into the mortgage rate
Cons
- Higher interest rate throughout the loan term
- Inability to remove PMI—the higher rate cannot be dropped upon reaching 20% equity
- Likely more costly in the long run
- May necessitate refinancing to eliminate the elevated rate
When LPMI Might Be a Suitable Option
LPMI could be a viable choice if:
- You desire the lowest monthly payment immediately
- You are confident about refinancing in a few years
- You don’t intend to keep the mortgage for an extended period
- You need a lower Debt-to-Income (DTI) ratio to qualify for the loan
- You prefer a predictable monthly payment without PMI charges
When LPMI Is Not Advisable
LPMI is generally NOT the right option if:
- You plan to stay in the home long term
- You desire the ability to remove PMI later on
- You prioritize long-term savings over short-term benefits
- Your credit score qualifies you for affordable monthly PMI (often cheaper than LPMI)
Determining If LPMI Is Worth It
Before opting for LPMI, consider the following:
- How long will I retain this mortgage? If you plan to refinance or sell within a few years, LPMI might help you save money in the short term.
- What is my PMI expense? If your PMI estimate is low (especially with good credit), BPMI is usually the better choice
- Do I prioritize monthly affordability or long-term expenses?
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- LPMI = lower immediate payment
- BPMI = typically lower overall expense
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- Can I qualify more easily with LPMI? No PMI might enhance debt-to-income ratios.
Alternatives to LPMI
If you aim to avoid or minimize PMI, consider these alternatives:
- Split-Premium PMI: Pay a portion of PMI upfront and the rest monthly.
- Single-Premium BPMI (Borrower-Paid): Pay a one-time upfront PMI fee without affecting the interest rate.
- Putting down 20%: The sole method to eliminate PMI entirely.
- Piggyback Loan (80/10/10): Second mortgage reduces the need for PMI but comes with additional expenses.
Common Questions About Lender-Paid Mortgage Insurance
1. Can LPMI be removed?
No. Since the cost is integrated into the rate, refinancing is the only way to eliminate it.
2. Is good credit required for LPMI?
Yes. Rates are adjusted based on credit score, and LPMI can become expensive for borrowers with lower scores.
3. Is LPMI available for FHA or VA loans?
No. LPMI is applicable only to conventional loans.
4. Does LPMI impact closing costs?
Not directly—the cost is included in the rate rather than paid upfront.