What is LPMI?
LPMI is Lender Paid Mortgage Insurance - rather thanstandard mortgage insurance which shows up in a borrowers monthly payment, with LPMI the lender pays for the mortgage insurance coverage on behalf of the borrower. Borrowers pay the lender for this coverage through a higher interest rate adjustment or an up front fee.
Now more than ever, LPMI can be a great option for home buyers because it can result in a lower monthly payment. It can also allow a buyer to qualify for a higher purchase price than a loan with regular monthly PMI. Since congress has not renewed legislation to make PMI tax deductible (it was deductible the past few years), PMI has become even more expensive & LPMI offers an even greater advantage than in the past.
How does it work?
The cost associated with LPMI comes as a pricing/rate adjustment. For example, with a FICO score of 740+ and a down payment between 10-15%, the LPMI adjustment on current rate sheets is 1.37 points ($1370 on a $100,000 loan, 1.37% of the loan amount). A borrower can absorb this pricing adjustment into the interest rate, or pay the pricing adjustment at closing to keep the rate the same as it would be with a monthly PMI loan.
Let's look at an example:
$300,000 purchase price, 3.5% down FHA loan (740+ FICO)
4.125% interest rate
$1427 principal & interest payment
$326 PMI payment
$1753/month TOTAL (Plus taxes & insurance)
Now let's look at a similar conventional loan with 5% down and LPMI (740+ FICO)
$4.875% interest rate (rate higher to absorb LPMI adjustment)
NO monthly PMI payment
$1534/month TOTAL (Plus taxes & insurance)
This particular adjustment (5% down, 740+ FICO score) is 2.15 points being absorbed into the interest rate. Even with the higher rate, a conventional loan with LPMI offers a much lower payment than a similar FHA loan.
Some other benefits of LPMI:
- LPMI can be paid for with sellers assistance - always worth considering when writing up a sales contract with less than 20% down.
- Since LPMI adjustments generally result in a higher interest rate, a portion of the additional cost can be offset with the interest deduction. (I am NOT a tax professional, so consult one for clarification)
Is LPMI always a good idea?
While it's always a good idea to consider, it's not always the right choice. With lower credit scores and lower down payments LPMI can get pretty expensive! It is also not available for FHA loans, so a buyer has to have 5% down payment.
If a buyer knows they'll be in their home for an extended period of time, sometimes monthly PMI is a better option because it can be cancelled when the home owner accrues equity. If a higher rate is taken to get LPMI, the rate is higher for the life of the loan.
How do I know which option is best?
If you're putting down less than 20%, be sure the lender you're working with is familiar with different options for mortgage insurance. We can easily create comparisons and scenarios with different programs & products. Your lender should be able to help you decide which option is the best one for you. Have questions on LPMI, PMI, or mortgage programs in general? Ask an expert!