LPMI stands for Lander-paid mortgage insurance and the concept of it is as simple as it is beneficial. For the borrower who cannot make a standard 20% down payment, additional payments for the insurance may seem “too much”, but it’s only because many don’t understand what LPMI really is and how it saves a borrower’s money.
Let’s start with a reminder that lender wants to protect his interests by all means. Those borrowers who pay 20% of the home’s value are not risky for the lender. If due to unexpected financial hardship, the borrower will fail to pay off the loan and the lender will start foreclosure procedure, he will not lose any of his money as he will simply sell the house. Even if the lender sells the house for the price lower than the market value, he does not lose anything as the borrower has paid 20% of the cost, so the down payment will cover the price difference. It is a different situation with borrowers who do not have money for down payment; they are more likely to go into foreclosure and thus – the higher level of protection the lender wants.
Unlike PMI, Lender-paid mortgage insurance is paid exactly by your lender to the Insurer. All the expenses are rolled into your mortgage cost and showed up in a higher interest rate you get for your home loan.
The benefits of LPMI
Here is the reasonable question: in which way LPMI could be beneficial for the borrower if it results in higher interest rate he pays to the lender?
First of all, without your insurance, the lender will simply refuse you in granting the loan. The more important question is – why paying higher interest rate with LPMI is more beneficial than just paying premiums for a standard Private Mortgage Insurance?
The answer is on the surface. Just because the lender operates thousands of Insurances he can get significantly better terms from the Insurer than a private borrower.
On conversion to a mortgage cost, your loan with LPMI will cost you considerably less, comparing to the loan under the PMI. For example, the average cost of a PMI is about 0.5 – 1.15% of the amount of the loan. On the other hand, LPMI “cost” results in about 0.2% higher interest rate. Now do the math and calculate how many thousands you save with Lender-paid mortgage insurance.
Of course, there is a con of LPMI. Because the “cost” of the insurance is inbuilt into your interest rate you cannot cancel the insurance later in order to reduce the rate.
LPMI or PMI? How to choose?
Taking into account all benefits and cons described above, you should decide whether you prefer to pay a slightly higher interest rate during the whole lifetime of a loan, or you would better pay monthly premiums until your repayments to a lender reach 20%.
Still, there is a way to get rid of LPMI when it is not needed anymore. In order to do that the borrower has to refinance his loan.
It needs to be said, that lender-paid mortgage insurance could be provided only to borrowers with excellent credit score. You will also not get LPMI on the government loan, only on conventional home loan.
There is also one substantial benefit of LPMI comparing to Borrower-paid mortgage insurance (BPMI) – it’s totally tax-deductible. We will talk about it after we’ll figure out how to minimize the cost of your mortgage loan with LPMI.
What factors affect the cost of your LPMI?
The higher your credit score the more reliable you are in the eyes of a lender. That results in a lower cost of your LPMI which is shown in a lower interest rate. The score of 750 and more is considered excellent and makes you trustworthy for the lender. Below 700 or 650 is considered bad credit score and it leads to proportional interest rate growth.
Another obvious factor which affects the terms of LPMI is the initial amount of money you have for making the down payment. It stands to reason that if your only have 3-5% of the total cost of the house, your interest rate under LPMI will be higher as the lender needs to take measures to protect his interests in case of foreclosure. By paying higher interest rate you compensate the risk the lender takes by lending you money.
The interest rate will be lower if you have 10-15% for down payment.
What about taxes?
This is a significant advantage of LPMI over BPMI. Along with saving money on monthly installments (like you would pay for Borrower-paid mortgage insurance, you save money by distracting taxes from your monthly paid interest rate. It needs to be said that until the 2015 year PMI was also tax-deductible and many were expecting and hoping for tax-deductibility extension, but lobbying has failed and currently, PMI is not tax-deductible (and therefore is less popular among clients).
What are the requirements to the borrower for LPMI?
Like it was mentioned above, in order to get LPMI, the borrower has to have an excellent credit score 700 and higher.
Other requirements vary from lender to lender so you may negotiate and choose the most favorable terms.