What Are the Pros and Cons of Lender-Paid Mortgage Insurance (LPMI)?
Mortgage insurance is usually required by lenders if the borrower can’t put down at least 20% as a down payment when purchasing the home. Mortgage insurance does not benefit the borrower in any way. Instead, it is what protects the lender and repays them if the borrower doesn’t pay back their mortgage loan. There are ways to get around this requirement though.
Most lenders have the ability to pay the cost upfront through lender-paid mortgage insurance (also known as LPMI). If you choose this option, you will get a higher interest rate on your loan in order to compensate for not paying the mortgage insurance yourself.
For LPMI homes, the interest rates will normally be at least a quarter, if not half, of 1% more. So let’s look at some pros and cons.
Pros of LPMI
Your monthly payment is lower. Since you aren’t making payments toward mortgage insurance, your monthly costs will be lower.
Your down payment can also be lower. LPMI homes don’t require 20% down, so the costs you will have to pay upfront will be significantly less as well.
Cons of LPMI
Your interest rate will be higher. In order to make up for paying no mortgage insurance, you will end up paying more in interest instead. If you are planning on staying in the home a long time, this interest can add up over the years.
Interest rates are rising. Since lenders are expecting interest rates to increase in the next few years, LPMI mortgages will cost more. Always ask your lender to compare the costs of an LPMI mortgage with a conventional mortgage so that you can see which one gives you the best deal.
LPMI mortgages are more expensive with bad credit. Since your credit score is one of the primary determining factors for the interest rate that you get, if your credit score is low, your interest rate can be higher. So for borrowers with credit score below 700, these can costs even more. You can still choose to buy down your interest rate by paying points upfront if you choose to.