LPMI vs. FHA
What is Lender Paid Mortgage Insurance?
Lender Paid Mortgage Insurance is a form of PMI that is paid for by the lender, rather than by the borrower monthly. Some form of PMI is required whenever a borrower puts less than 20% down (or has less than 20% equity on a refinance) on a conventional loan.
The term “Lender Paid Mortgage Insurance” is a bit misleading, however. The lender does not pay the borrower’s mortgage insurance premium out of the goodness of its heart. Rather, the lender raises the interest rate on the mortgage to generate enough profit to pay the mortgage insurance company a required one-time fee.
The party who ends up paying the cost of LPMI is ultimately the borrower, since it’s the borrower’s interest rate that is increased. However, ever after the slight rate increase for LPMI, it is still a more cost effective option than an FHA loan.
Is LPMI better than FHA?
Federal Housing Administration (FHA) loans have been a great tool for homebuyers over the past few years. If not for FHA, many would be locked out of homeownership. However, FHA is increased its fees again as of April 1, 2013, to steady its troubled financial position. LPMI has since become a more attractive option.
It’s true that the interest rate on an LPMI loan would be higher than an FHA loan. But FHA has very high monthly mortgage insurance costs, and also an upfront fee of 1.75% of the loan amount. FHA mortgage insurance negates any savings from a lower interest rate.
Still, FHA may be a better option for some homebuyers. FHA allows for as little as 3.5% down, compared to LMPI’s 3% down requirement. FHA also allows for larger seller contributions toward closing costs (6% versus 3%). Leniency from FHA also means borrowers with lower credit scores may qualify (we have FHA financing available down to a 620 middle FICO score).
As shown in the chart below, each borrower would have to analyze their available funds, their monthly payment tolerance, and their credit rating to opt for LPMI or FHA.
Payments and Out-Of-Pocket Expense: LPMI vs Monthly PMI vs FHA
Which mortgage option comes out on top? Let’s look at an example of a $412,375 home purchase:
|LPMI with 3% down||Monthly PMI with 3% down||FHA with 3% down|
|Loan Amount||$400,000||$400,000||$407,000 (includes 1.75% upfront fee)|
|Interest Rate & APR||4.125% (APR 4.125%)||3.875% (APR 3.875%)||3.25% (APR 5.289%)|
|Principle and Interest Monthly Payment||$1,939||$1,881||$1,799|
|Monthly mortgage insurance||$0||$180||$450|
|Estimated Monthly Taxes and Insurance||$513||$513||$513|
|Estimated Total Cash Needed to
Close the Loan
LPMI comes out on top based strictly on monthly payment. But that’s not the whole story. LPMI has its advantages as well as disadvantages depending on other factors.
- Homebuyers can put as little as 3% down on a home, rather than the standard 20%, yet avoid monthly PMI
- The initial monthly payment for LPMI loans is often lower than that of monthly PMI or FHA financing
- When rates are low, homebuyers can get a great rate despite the LPMI rate hike
- Those who qualify for monthly PMI probably also qualify for LPMI
- After the FHA cost increase, LPMI has become cheaper in comparison.
- Your interest rate remains higher through the life of the loan (BPMI can fall off once you’re at an 80% loan to value)
- A fairly high credit score is needed to qualify for LPMI (680 or above) — this is the only area where FHA still outshines LPMI
- LPMI requires higher out-of-pocket costs than FHA (FHA requires only 3.5% down compared to 3% for LPMI)
Ask Yourself: How Long will I Keep this Mortgage?
Even though the monthly payment on an LPMI loan might be cheaper initially, it might cost more than monthly PMI if you keep your loan for 30 years. This is because you can cancel monthly PMI when your loan reaches an 80% Loan-to-Value (LTV), but you can’t lower your LPMI interest rate at any time without refinancing. Let’s look at a cost comparison of a person who keeps their mortgage for 10 years and 30 years. All scenarios assume a 3% down payment:
after 10 years
after 10 years (MI off at year 7)
after 30 years
after 30 years
|Interest Rate & APR||4.25% (APR 4.25%)||3.99% (APR 3.99%)||4.25% (APR 4.25%)||3.99% (APR 3.99%)|
|Lifetime MI cost||$0||$15,120||$0||$15,120|
|Principle and Interest Payments||$1,968 x 120 months: $135,960||$1,907 x 120 months: $228,840||$1,968 x 360 months: $708,480||$1,907 x 360 months: $686,520|
|Total Principle, Interest, and PMI costs||10 years: $236,160||10 years: $243,960||30 years: $708,480||30 years: $701,640|
Over 30 years, the BPMI option comes out ahead of the LPMI option, assuming the BPMI is paid over the first 10 years. But it takes a long time – 29 years and 8 months. LPMI is the better choice when taking into consideration the time value of money and the higher tax write-off you’ll receive for the higher interest rate (BPMI generally cannot be used as a deduction). Where BPMI shines is if the home appreciates at an accelerated rate and the BPMI is removed early. It’s really a toss-up between LPMI and BPMI, as it all depends on what home values do which determines the better choice. The more conservative route is to take LPMI.
Should You Choose LPMI?
The main benefit to LPMI is simply lower monthly payments at the beginning of the mortgage, when you’re first starting out on your homeownership journey. It’s a great program for those with good credit who want a low monthly payment and understand that unless it’s over a very long timeline, the alternatives are more costly.