Need a PMI Alternative? Think Lender Paid Mortgage Insurance
The PMI Alternative
Lender Paid Mortgage Insurance (LPMI) may be a good alternative for borrowers who do not want to pay Private Mortgage Insurance (PMI).
Both PMI and LPMI insure the lender against default on conventional loans greater than 80% loan to value (LTV). The biggest difference in the two options is who pays the premium.
The insurance premium on the PMI option is added to the total monthly mortgage payment and paid by the homeowner. The lender then forwards it to a third-party insurance company.
The insurance premium on the LPMI option is paid directly by the lender to a third-party insurance company. The homeowner does not pay the premium. Instead, the lender charges a higher interest rate on the mortgage to offset the cost of the insurance.
Other DifferencesMortgage with PMI:
- Lower interest rate but typically a higher payment (after adding on the PMI premium)
- Not tax deductible (on loans that closed after 12/31/11)
- Can possibly be cancelled once the loan dips below 80% LTV (contact specific lender to learn about their process canceling PMI)
- Higher interest rate but typically a lower payment (no PMI premium added)
- Potentially larger tax deduction (a higher rate can equal a higher tax deduction. Please consult an accountant)
- Cannot be cancelled
Is LPMI Right for You?
There is no universal correct answer when choosing between if PMI and LPMI. What is right for some may not be right for others.
LPMI might be right for you if you:
- Have a mortgage term under 15 years
- Might refinance or sell your home within 10 years of obtaining new mortgage
- Are borrowing over 85% LTV
- Want a higher tax deduction (Please consult your accountant)
Paying LPMI might not make sense if you are planning to hold onto your mortgage for a longer period of time. Remember, with LPMI you will be paying the higher rate for the life of the loan.
On the other hand, PMI is temporary and can be terminated once the loan balance drops below 80% LTV. At that point you will be left just your regular mortgage payment that is based on the lower interest rate.
Mortgage insurance provides millions of people with the opportunity to buy a home or refinance into today's historically low rates, despite decreasing home values. While having to pay it is not ideal, having a choice of how to pay it certainly helps.