On most mortgages, the borrower pays PMI, or private mortgage insurance, it is an extra cost factored in to the borrowers monthly mortgage payment. But, using LPMI saves the borrower money because they don't have to buy Private Mortgage Insurance separately.
In exchange for paying the mortgage insurance up-front, the lender will charge a higher interest rate. The higher interest rate is meant to offset the cost to the lender for paying the insurance.
Despite the catchy name, lender-paid mortgage Insurance is not paid by the lender. Instead, it is paid by the borrower, in the form of one large payment up front or in a series of smaller payments. The smaller payments will be built into your mortgage rate.
Mortgage insurance is always required whenever your down payment on your house is less than 20% of the home's value. It is meant to protect the lender from borrower default if the borrower cannot pay the mortgage.
Here are a few frequently asked questions:
There is no such thing as LPMI on FHA loans. PMI is required, and paid monthly for the entire term of the loan.
Yes, lenders collect the funds to pay PMI premiums from the borrower included in a monthly payment or at closing. The premium is reported on your 1098-INT tax form.
Generally, LPMI is a better option for shorter term loans like a 10 or 15 year loan. Longer term loans like a 30 year fixed mortgage may not be best suited to use LPMI because you will be paying a higher interest rate over the entire life of the loan.