Whether you’re browsing homes for sale in Seattle, WA or previewing homes in Austin, TX, if you’re planning on buying a home with less than 20% down, you’re probably going to need some form of mortgage insurance. Most buyers are familiar with Borrower Paid Mortgage Insurance (BPMI), which is PMI that you pay monthly until you reach 20% equity. However, there are other options that lenders may offer. That is Lender Paid Mortgage Insurance (LPMI).
Using LPMI lowers your monthly payments and eliminates monthly PMI fees, but it comes with long-term tradeoffs. This Redfin article details how LPMI works, how it compares to traditional PMI, who it’s best for, and how to decide if it makes sense for your situation.
What is Lender Paid Mortgage Insurance (LPMI)?
Lender-paid mortgage insurance (LPMI) eliminates the need for monthly PMI payments because your lender prepays the mortgage insurance premium on your behalf. In return, the lender charges a higher interest rate over the life of the loan.
LPMI is essentially “wired” into your mortgage interest rate. You’ll save on monthly PMI, but you’ll pay more interest over time.
How LPMI works
LPMI can be structured in two main ways.
1. Single premium LPMI (most common)
The lender pays a one-time upfront PMI premium, and you pay a slightly higher interest rate.
2. Lender-funded LPMI
Lenders will roll that cost into your loan or adjust your interest rate higher to cover the ongoing insurance premiums.
Regardless of the structure, both forms of LPMI will eventually raise interest rates to cover costs. In the end, the trade-off is:
No monthly PMI fees, but your mortgage rate will permanently increase
What is Borrower Payments PMI (BPMI)?
Before comparing LPMI and BPMI, it is helpful to understand how traditional PMI works.
Borrower-paid PMI (BPMI) is the standard form of mortgage insurance that most buyers pay when they make a down payment of less than 20% on a conventional loan. Using BPMI:
Borrowers pay a PMI fee each month on top of their mortgage payment. Costs vary depending on your credit score, loan type, and down payment. PMI can be removed later, usually when you reach 20% equity. PMI is not factored into your interest rate, which results in lower interest rates.
This is the type of PMI that most homebuyers encounter. It appears as a separate line item on your monthly mortgage bill until you meet a certain equity threshold for your loan. In some cases, depending on your lender’s guidelines, you may be able to request a new appraisal and earlier release of PMI. Once removed, you will continue to pay the same low interest rate.
LPMI vs. Borrower-Paid PMI (BPMI)
Here’s how LPMI compares to the traditional PMI options most buyers encounter.
Features LPMI BPMI (Traditional PMI) Who pays the premium? Lender (costs are built into the interest rate) Borrower (monthly fee) Monthly PMI payments No Yes, up to 20-22% equity Interest rate High Low Ability to remove PMI No – interest rate remains forever high Yes – Cancellable at 20% equity Is it better to pay less upfront? Possible depending on PMI cost Depending on PMI costs Are long-term savings better? Usually no, usually yes
In most scenarios, BPMI will be more cost-effective over the life of the loan, but if monthly affordability is important to you, LPMI may be beneficial in the short term.
Example: Cost comparison between LPMI and BPMI
scenario:
Purchase price $450,000 5% discount ($22,500) 30 year fixed mortgage Buyer has good credit
With BPMI
Interest rate: 6.5% Monthly PMI: $140-$200 depending on creditworthiness PMI decreases when equity reaches approximately 20% (approximately 5-8 years)
With LPMI
Interest rate: 6.875% No monthly PMI Higher interest rates mean more interest paid over time Cannot reverse higher interest rates
For the first few years, the LPMI option may reduce your monthly costs slightly, but not always. Whether LPMI actually lowers your payments depends on your PMI rate. Over the life of the loan, BPMI almost always wins financially.
Use Redfin’s mortgage calculator to estimate how PMI will affect your monthly payment and compare it to higher-interest loan scenarios.
Advantages and disadvantages of LPMI
Strong Points
No monthly PMI payments — lowers the initial cost of your home Your monthly payments may be lower compared to a loan with BPMI You may qualify more easily because your monthly debt burden is lower Simple payment structure with everything rolled into your mortgage rate
Cons
Your interest rate will rise over the life of your loan No option to remove PMI – Once your equity reaches 20%, you can’t lower your higher interest rate You may need a more expensive long-term refinance To get out of your higher interest rate
When is LPMI the right choice?
LPMI has meaning in the following cases:
You want the lowest monthly payment now You’re confident you’ll refinance within a few years You don’t plan on staying with your mortgage for the long term You need a lower DTI to qualify for the loan You want predictable all-in monthly payments with no PMI fees
When LPMI isn’t right for you
LPMI is usually not the right choice if:
You plan to stay in your home for the long term You want the ability to remove PMI later You prefer lifelong savings over short-term savings Your credit score may qualify you for low-cost monthly PMI (often cheaper than LPMI)
How to decide if LPMI is worth it
Before choosing LPMI, ask yourself the following questions:
How long will you hold this mortgage?If you plan to refinance or sell within a few years, LPMI can help you save some short-term cash. How much does my PMI cost? If your PMI estimate is low (especially if you have good credit), BPMI is usually better. Do you care more about monthly affordability or long-term costs? LPMI = lower monthly payments BPMI = likely lower overall costs Will LPMI help you qualify more easily? Without PMI, your debt-to-income ratio may not improve.
Alternatives to LPMI
If you want to avoid or reduce PMI, there are other ways to do it, including:
Split Premium PMI: Pay part of your PMI upfront and part in monthly payments. Single Premium BPMI (Borrower Pays): Pay just one upfront PMI fee without increasing your interest rate. 20% reduction: The only way to avoid PMI completely. Piggyback Loans (80/10/10): Second mortgages reduce the need for PMI, but come with their own costs.
Frequently asked questions about lender-paid mortgage insurance
1. Can I remove LPMI?
no. Since the cost is built into the interest rate, the only way to eliminate the cost is to refinance.
2. Does LPMI require sufficient trust?
yes. Interest rates adjust based on creditworthiness, so LPMI can be expensive for borrowers with low scores.
3. Is LPMI available for FHA or VA loans?
No, LPMI only applies to conventional loans.
4. Does LPMI affect closing costs?
Not directly. Costs are built into the price rather than being paid upfront.
