Lender-Paid Mortgage Insurance (LPMI)

by Elena Romanova on February 20, 2008


Lender-Paid Mortgage Insurance (LPMI) is one of the ways, along with the Piggyback loan, to avoid the notorious conventional Private Mortgage Insurance (PMI) if you borrow more than 80% of the purchase price while buying yourself a home.

To be perfectly honest, you, as the borrower, are the one to pay this insurance anyway. The amount the lender pays as insurance premiums is charged on to you through a higher interest rate on your mortgage. The difference lies in how the amount of your monthly payments towards the insurance is determined. Technically, the lender shops for the insurer himself, but unlike PMI, in the case of LPMI he is interested to get a better deal with a lower insurance rate, as there is no referral involved and the resulting interest rate on his mortgage products has to be still competitive. Consequently, the borrower ends up with a higher interest rate on his mortgage, but does not have to pay private mortgage insurance. How good is that?

Both PMI and LPMI premiums are to be paid as long as the balance of the loan is above 80% of the purchase price of the mortgaged property. PMI makes the borrower pay higher premiums based on a higher insurance rate. These may be quite a burden, considering they come as an addition to the regular monthly payments towards the loan itself. LPMI, however, has a lower insurance rate and thus requires a lower payment from the lender, which he, in his turn, gets refunded from the borrower’s monthly payments based on a higher loan interest rate. The LPMI payments are easier on the borrower as the total monthly payment amount is lower compared to PMI and the borrower has only one loan to deal with. As soon as the marker of 80% is reached, however, PMI can be terminated in accordance with the corresponding rules and regulations, whereas LPMI cannot be terminated at the borrower’s request at all. The borrower is obliged to pay according to the high interest rate throughout the life of the mortgage, irrespective of the fact whether the lender is still paying insurance premiums or not. No obvious advantage to any of the insurances so far…

Until 2007 lender-paid mortgage insurance had had an obvious advantage – interest payments were tax deductible, whereas insurance premiums were not. Then Congress made insurance premiums deductible too, but only for insurances originated in 2007 by families within a certain income range (approximately from $50,000 to $100,000 per month). The interest payments are still deductible as they were. In fact, the higher the mortgage interest rate (as in the case of LPMI), the bigger tax return you can expect. There is no law about insurance premiums for the year of 2008 and on, yet, but there is a great probability, that Congress will extend the deductions.

It’s a tough choice to make, isn’t it? The overall benefit may be quite considerable or barely noticeable. There are a lot of other factors that influence the difference: how long you are going to stay in the property, if the property appreciates in the course of time, if you are planning refinancing and the cost of it, and what’s more important – if your credit score is good enough to qualify for lender-paid mortgage insurance at all.

In conclusion, my purpose here is to let you know, that such an option exists. Use a good calculator (here is one of them), study the documentation provided by several lenders thoroughly before you make your final decision. And don’t forget – there is also a piggyback (or 80/20) mortgage option.

Update:

The deduction of premiums on traditional borrower-paid mortgage insurance has been extended through 2010. Now it applies to mortgage insurance contracts issued from Jan. 1, 2007, through Dec. 31, 2009.

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