Lender Paid M.I. Revisited – Why We Don’t Recommend It
We have been asked numerous times lately about “LPMI,” and it reminded us to re-publish the below comments.
We have many conventional borrowers with less than 20% equity (or down payment) and an aversion to Private Mortgage Insurance (PMI). These borrowers often ask about Lender Paid Mortgage Insurance or “LPMI.”
With LPMI a lender simply waives PMI requirements in exchange for a higher interest rate.
For example, a $400,000, 90% LTV loan might be at “No Points” at 4.25%* with a PMI rate of 0.44% (for strong borrowers). Alternatively, this same borrower would be at 4.625%* with LPMI and NO PMI payment (Lender waives PMI requirement in exchange for a 0.375% higher rate).
This might seem like a great deal on the surface because the LPMI interest rate is lower than the combined interest and PMI rate.
Nevertheless, we discourage LPMI because of what happens when rates and values go up, which we are seeing recently. If rates go up 2% and home values go up 10% (and they will), the borrower with PMI can eliminate his PMI requirement and live happily ever after with his 4.25% rate. The LPMI borrower, in contrast, will be stuck with his higher rate forever, irrespective of home appreciation; his thinking was too short term when he took out his loan.
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 01524255, NMLS# 335646