LPMI stands for Lender Paid Mortgage Insurance and is sometimes used for conventional, conforming loans.
Before we cover LPMI, let’s recap three different types of loans and the general mortgage insurance rules with them —
Mortgage Insurance For FHA Loans
All FHA loans require that you pay an up-front mortgage insurance premium (UFMIP) regardless of the term of the loan. Recently, FHA changed the UFMIP % requirements in an attempt to match the risk of the loan with the UFMIP requirements. Higher risk = higher UFMIP.
If you have a 30 year FHA loan, you must have monthly mortgage insurance until you actually pay down the balance of your loan to 78% loan-to-value. For mortgage insurance requirements, FHA doesn’t allow you to factor in home appreciation to arrive at a 78% loan-to-value — you must have paid down the balance of the loan in order to waive mortgage insurance.
If you have an FHA 15 year (or less) loan, and your loan-to-value is less than 90%, this is the only time that FHA allows for the home appreciation to be factored in when calculating loan-to-value % and mortgage insurance requirements.
Mortgage Insurance For VA Loans
VA loans NEVER have monthly mortgage insurance — so that is easy to cover.
Mortgage Insurance For Conventional Loans
Regular, conventional loans require mortgage insurance on first liens with a loan to value of 80.01% of greater. Another way of saying this is when the borrower puts less then 20% down, mortgage insurance is required.
Mortgage Insurance rates are calculated based on a complicated combination of credit scores, required lender coverage, loan to value, and type of program. In order to drop mortgage insurance with a conventional loan, you must petition the lender and often they will ask you to pay for a current market appraisal to prove the 20% or greater equity in the property. Also, you must not have had any mortgage late payments.
What Is LPMI?
With a conventional loan, it is possible for the lender to pay the mortgage insurance on your loan — in exchange for a slightly higher interest rate on the loan. Is it wise to pick a loan where the lender pays the mortgage insurance in exchange for a higher rate?
It is possible that the higher interest rate using LPMI will save you money on a monthly basis than a lower interest rate with regular mortgage insurance.
It is also possible that the higher interest rate using LPMI will cost you more money on a monthly basis than a lower interest rate with regular mortgage insurance.
The first question I generally ask if someone is interested in possibly using an LPMI program is “how long do you plan to stay in the loan?” The second question is ask is “how long do you plan to stay in the home?” If the answer to either of these questions is more than 5 years, I tell them that it probably wouldn’t make sense in their case.
Generally speaking — if you plan to be in a loan for a shorter period of time, LPMI can make sense.
Over the last year or so, many lenders have dropped their LPMI programs, so it is much harder today to find a lender who even offers LPMI programs — and the few that do are requiring higher credit scores than they used to in order to qualify for the program.
For some people, LPMI programs may make sense. If you seem to refinance every couple of years or plan to refinance again in a shorter period of time — LPMI may make sense for you. If you plan on staying in a loan for a longer period of time (think 5 years +), then make sure that you do the math and don’t get caught spending thousands of extra dollars for not looking ahead.
Get Rid of PMI: Find Out More About LPMI
If you are interested in getting more information about an LPMI program that can help you save money then the easiest thing to do is get multiple quotes from multiple lenders about their LPMI programs. Each lender may have a different program, so if you are in the market for LPMI programs, you will do yourself a favor by shopping as much as possible. Get a free mortgage quote for an LPMI program today!