Private Mortgage Insurance (PMI) is required with conventional mortgage loans when you put down less than 20 percent on your home purchase. PMI helps lenders mitigate risk to offer low down payment purchase financing and is why three percent down payment programs exist.
PMI is traditionally paid monthly. While it adds a small premium to your monthly payments, it doesn’t last forever. You can cancel these premiums once you have enough equity in your home.
An alternative to monthly PMI payments is lender-paid private mortgage insurance (LPMI). With LPMI, your lender handles the mortgage insurance payments. However, this is not a no-cost option and typically results in a higher interest rate.
Read on to learn more about LPMI vs. PMI or apply to get pre-approved for your mortgage loan now. TABLE OF CONTENTS
Lender-paid private mortgage insurance (LPMI) is a type of PMI that is arranged and paid for by your mortgage lender. You’ll typically pay for this service with a higher interest rate.
With lender-paid private mortgage insurance, your mortgage insurance is either built into the closing costs or paid via a higher interest rate.
Lenders can negotiate lower premiums in bulk than a home buyer could on a single PMI policy, so LPMI is often cheaper than monthly PMI payments. However, LPMI policies cannot be canceled. You must pay off the loan or refinance to drop the insurance — and the higher rate it comes with.
LPMI often results in a lower monthly payment, though it may cost more in the long run.
Private mortgage insurance (PMI) is a type of insurance policy that mitigates the lender’s risk, allowing them to offer low down payment purchase financing.
Private mortgage insurance is a type of insurance required on conventional loans when you put down less than 20 percent on a home purchase. The home buyer pays the monthly premium, and the insurance reduces the lender’s risk to provide purchase financing with as little as 3 percent down.
Buying a home is an exciting milestone in life. But coming up with the down payment can be challenging, especially for first-time homebuyers. A down payment of 20% or more of the purchase price is often recommended to get the best mortgage rates and avoid private mortgage insurance (PMI). But few buyers can afford that, particularly in today’s competitive housing market.
That’s where lender-paid PMI loans come in. With this type of mortgage, you can put down less than 20% and avoid paying for PMI yourself. Instead, the lender pays the cost and recovers it through a slightly higher interest rate.
Lender-paid PMI opens homeownership possibilities if you don’t have tens of thousands of dollars saved upfront. But is it right for you? Here we’ll demystify how these loans work so you can decide if a lender-paid PMI mortgage is your ticket to homeownership.
What Exactly Is PMI?
Let’s start with explaining what PMI is PMI stands for private mortgage insurance. It protects the lender in case you stop making payments on your home loan.
Lenders usually require PMI when your down payment is less than 20% of the purchase price. The insurance gives lenders more security by covering potential losses if you default.
PMI is typically an annual cost equal to 0.5% to 1% of the mortgage amount. On a $200,000 loan, you could pay $1,000 to $2,000 per year. The premiums are included in your monthly mortgage payments.
Borrowers with higher credit scores tend to get lower PMI rates. And PMI usually costs more for adjustable-rate mortgages versus fixed-rate loans.
When Can PMI Be Canceled?
PMI continues until you reach 20% equity through payments and home appreciation. Then you can request to have PMI canceled. The lender must automatically terminate PMI when you hit 78% loan-to-value or reach the midway point of the mortgage term.
Introducing Lender-Paid PMI
With lender-paid PMI mortgages, you don’t have to worry about budgeting for PMI premiums every month. The lender pays for the PMI up front and gets reimbursed through your higher interest rate.
Instead of you writing a PMI check each month, the lender simply charges you a slightly higher rate from the start. Typical lender-paid PMI rates run around 0.25% to 0.75% higher than comparable mortgages without lender-paid PMI.
On a $200,000 loan at 4.25% interest, opting for lender-paid PMI at 4.5% would cost about $208 more per month than if you paid traditional PMI separately.
Whether getting lender-paid PMI saves money depends on how long you keep the loan and how much PMI would have cost you otherwise. We’ll break down the math later.
First, let’s look at the pros and cons of lender-paid PMI loans.
Pros of Lender-Paid PMI
1. One less bill to keep track of. Instead of budgeting for a PMI payment separately each month, the cost is rolled into your mortgage payment for a single payment.
2. Potentially lower overall costs. By folding PMI into your interest rate from day one, lender-paid PMI can sometimes cost less than paying traditional PMI over the life of the loan.
3. Eliminates surprises. With regular PMI, your premiums can increase if your credit score drops. Lender-paid PMI locks in set payments for the long haul.
4. Easier to qualify. Lender-paid PMI makes it easier to meet debt-to-income requirements since there’s no separate PMI payment.
5. Buy sooner. You can purchase with less cash upfront since 100% financing is allowed with lender-paid PMI on conventional loans.
Cons of Lender-Paid PMI
1. Higher interest rate. You’ll pay a higher rate than with a similar loan without lender-paid PMI.
2. Harder to remove. Canceling lender-paid PMI is not automatic. You’ll likely need 20% equity plus a home appraisal to remove it.
3. Costs more over shorter terms. Paying a higher rate from the start can cost more than paying regular PMI if you sell or refinance within a few years.
4. Limited availability. Not all lenders offer loans with lender-paid PMI. So shop around if you want this option.
How to Figure Out if Lender-Paid PMI Saves Money
Whether getting a mortgage with lender-paid PMI makes financial sense depends largely on three factors:
- Your loan amount
- How long you plan to keep the mortgage
- What your regular PMI payments would be
The math can get complicated quick. But here’s a simple way to estimate potential cost differences:
1. Determine the monthly savings from a lower PMI rate with lender-paid PMI. For example, if PMI would cost you $150 per month but lender-paid PMI is equal to a $100 rate bump, your monthly savings is $50.
2. Calculate how many months it would take to recoup the higher interest costs. If your rate is 0.25% higher for lender-paid PMI and that equals $50 more interest per month, it would take you 120 months, or 10 years, to make up the difference ($50 x 120 months = $6,000).
3. Consider your time horizon. If you expect to move or refinance sooner than the breakeven point, stick with regular PMI. If you’ll keep the loan longer, lender-paid PMI could yield net savings in the long run.
Running the numbers with various scenarios will give you the best sense of when lender-paid PMI offers the lowest total costs. Online calculators can automate the process for you.
Who Is a Good Fit for Lender-Paid PMI?
Lender-paid PMI loans can be a smart choice in these situations:
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You expect to keep your mortgage long term, such as beyond 10 years. The savings from lowered PMI outweigh the higher interest costs over longer periods.
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Your credit score is under 740. With a lower credit score, regular PMI costs will be relatively high. Folding PMI into your interest rate from the start could save big.
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You want simpler financing. Combining PMI and interest avoids hassles like variable PMI premiums and having to remember to pay bills separately.
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You’re buying soon. If you don’t have much cash on hand yet for a down payment, lender-paid PMI allows you to buy now with less money upfront.
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You have other debt. With no separate PMI payment to budget for each month, lender-paid PMI can help you meet the lender’s debt-to-income requirements more easily.
Tips for Getting a Lender-Paid PMI Mortgage
Only some lenders offer mortgages with lender-paid PMI. Here are tips to find the right loan:
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Check with banks and credit unions you already have a relationship with. Existing financial ties can help with approval odds.
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Search online for lender-paid PMI mortgage options. Compare interest rates and fees across multiple lenders.
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Get prequalified to view personalized loan options and precisely calculate potential savings from lender-paid PMI.
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Ask about discounts. Many lenders offer a slightly lower rate if you have excellent credit or opt for automatic payments.
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Mind closing costs. Lender fees vary, so include those when comparing total costs.
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Lock in early. Rates change frequently. Lock in your rate as soon as you find a competitive offer.
Alternatives to High PMI Costs
If lender-paid PMI doesn’t pencil out for your situation, you may have alternatives to avoid expensive PMI:
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Make a larger down payment if possible to quickly reach 20% equity and eliminate PMI.
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Take out two mortgages. An 80-10-10 or piggyback loan combines a first mortgage for 80% of the value with a second mortgage for 10% down, so you avoid PMI.
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Look into government loans like FHA, VA and USDA loans made for buyers with smaller down payments.
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Ask about buying lender credits. You pay a higher rate and the lender uses credits to prepay PMI for you.
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Wait to buy. If you can keep saving, a larger down payment later could avoid PMI and interest costs altogether. But prices and rates may be higher in the future.
The Bottom Line
While lender-paid PMI isn’t for everyone, it can help make homeownership possible sooner by reducing upfront and monthly costs.
Four Types of PMI
There are four ways to pay for Private Mortgage Insurance. Your options will typically depend on what your lender offers.
Private Mortgage Insurance can be purchased as:
- Borrower-paid monthly PMI — Default monthly PMI option that can be cancelled when you build 20 percent home equity.
- Borrower-paid single-premium PMI — Allows the buyer to pay the insurance premium up-front and is non-refundable.
- Borrower-paid split-premium PMI — Buyer pays a portion of the premium up-front and a reduced monthly payment.
- Lender-paid PMI — Lender-arranged PMI that is via an increased interest rate and cannot be canceled.
The Benefits of Private Mortgage Insurance
Borrower-paid PMI has its benefits, too. For one, it’s more accessible. Every lender has borrower-paid PMI options, but not all offer LPMI.
You can also cancel borrower-paid PMI once you reach 20 percent equity in your home. This is great if you plan to be in your home long-term, and you can look forward to a lower payment once you reach 20 percent equity.
Remember that your equity rises when home values rise, so you may reach 20 percent equity sooner than expected.
Lender Paid PMI Explained
FAQ
What does “lender paid PMI” mean?
How to disclose lender paid mortgage insurance?
Can lender paid mortgage insurance be canceled?
What is the difference between lender paid and borrower paid?
Do you need PMI if you have a mortgage?
PMI is usually required when the down payment is less than 20% of the home’s value. In some situations, a lender may arrange for PMI coverage. It then becomes known as lender-paid mortgage insurance. For some homebuyers, LPMI can work in their favor. But for others, having a lender secure private mortgage insurance can end up costing them.
How much is PMI on a mortgage?
If the mortgage insurance company is charging you 1%, your annual PMI payment is $1,900. Your lender will likely consolidate the monthly PMI fee of $158.33 along with your mortgage payments. You can also use our mortgage calculator to get an estimate that includes property taxes, homeowners insurance and mortgage interest. PMI Vs.
What is lender-paid private mortgage insurance (LPMI)?
What is LPMI? Lender-paid private mortgage insurance (LPMI) is a type of PMI that is arranged and paid for by your mortgage lender. You’ll typically pay for this service with a higher interest rate. With lender-paid private mortgage insurance, your mortgage insurance is either built into the closing costs or paid via a higher interest rate.
Is PMI a monthly payment?
PMI is traditionally paid monthly. While it adds a small premium to your monthly payments, it doesn’t last forever. You can cancel these premiums once you have enough equity in your home. An alternative to monthly PMI payments is lender-paid private mortgage insurance (LPMI). With LPMI, your lender handles the mortgage insurance payments.
What is private mortgage insurance (PMI)?
Private mortgage insurance, or PMI, protects the lender in case you default. Some or all of the mortgage lenders featured on our site are advertising partners of NerdWallet, but this does not influence our evaluations, lender star ratings or the order in which lenders are listed on the page. Our opinions are our own. Here is a list of our partners.
How does PMI insurance work?
The coverage will pay a portion of the balance due to the mortgage lender in the event you default on the home loan. Usually, you pay for PMI monthly as part of your mortgage payment. The insurance does not prevent you from facing foreclosure or experiencing a decrease in your credit score if you get behind on mortgage payments.