Many lenders tout Lender-Paid-Mortgage-Insurance (LPMI) as a way to avoid mortgage insurance. In fact, one of our lending sources (Quicken) has extremely good LPMI rates. With LPMI, borrowers can avoid mortgage insurance altogether by taking a slightly higher interest rate (3/8 to 1/2 percent higher for a 90% LTV for example).
What Is Lender-Paid Mortgage Insurance (LPMI)?
There is no free lunch, however. Lenders are merely using the extra commission or yield premium that comes from the higher rate to pay for a “lump sum” PMI.
LPMI vs. Monthly PMI: Which Is Better?
The drawback to LPMI is that borrowers are permanently stuck with the higher rate. With monthly PMI, borrowers can get a lower rate and then eliminate the PMI when their loan-to-value drops below 80%. In the long run, monthly PMI is almost always a better deal.
There is one exception: Sometimes borrowers have to take LPMI to qualify for financing that they cannot qualify for with PMI.
