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Do You Really Need Private Mortgage Insurance?

Nobody likes paying for private mortgage insurance but unfortunately it’s a necessary evil if you’re financing more than 80% of the value of your home. The good news is that you may be able to take advantage of a little known trick that could save you some extra money on your total mortgage payment.

What’s this trick? It’s called lender paid mortgage insurance, or LPMI.

BPMI Vs. LPMI

The traditional form of mortgage insurance that most people are used to is borrower paid mortgage insurance, or BPMI, which is tacked onto the private mortgage insurance payment. LPMI, on the other hand, is paid for by the lender in exchange for a slightly higher interest rate.

To see why LPMI can be a good option, let’s take a look at a scenario very similar to a refinance I once did for a client. My client’s loan amount was around $400,000 on a house that was worth around $425,000, which put him at 94% loan-to-value (LTV) — solid PMI territory.

My client planned to keep the home only for a few years and his goal was just to save as much money as possible on his payment. I was already reducing his payment by around $400/month even with BPMI, but LPMI offered him a chance to save even more money.


Check out the chart, which shows how the numbers crunched out for the BPMI and LPMI loan options. Yes, the rate for the LPMI option is 0.25% higher, but the overall payment is lower because there’s no longer a premium tacked onto the mortgage payment. Going with the LPMI saved my client another $138/month, which made his total payment savings versus his current loan nearly $540/month. I’d say that’s a pretty good deal, and my client agreed!

Private Mortgage Insurance Chart

When LPMI Makes Sense

LPMI isn’t necessarily a good fit for every scenario, so the following are a few things to keep in mind when evaluating a mortgage option with LPMI:

  • LPMI only makes sense for short term applications. LPMI usually only makes sense if you’re planning to keep the loan just a few years because of the higher rate. If you keep the loan long term, you may end up paying too much in interest costs over the life of the loan and negating the added payment savings generated by the LPMI.
  • You can’t get rid of LPMI at 80% LTV. LPMI is baked into the rate, so you can only get rid of it by refinancing. If you’re going to have the loan long enough to pay down to 80% LTV, it’s better to go with BPMI so you have the opportunity to drop your mortgage insurance.
  • LPMI is only available for conventional financing. FHA mortgage insurance is always borrower paid (sorry!).

Not all lenders offer LPMI, so if you’re thinking it might be a good option, be sure to ask any lender you’re working with up front if they can offer it. If they can’t, you might want to find another lender who can.

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Mark Fitzpatrick is a California-based mortgage banking veteran. You can follow Mark on Google+ or onTwitter. NMLS #382064. Contact: MortgagesMusings

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