What Is LPMI? How Lender-Paid Mortgage Insurance Works

Considering purchasing a home with less than 20% down, whether you’re eyeing a home for sale in Seattle, WA or exploring properties in Austin, TX? Chances are you’ll come across mortgage insurance in some form. While most buyers are familiar with borrower-paid mortgage insurance (BPMI), there’s another option your lender might offer: Lender-Paid Mortgage Insurance (LPMI).

LPMI has the potential to reduce your monthly payment and eliminate monthly PMI charges, but it does come with some long-term trade-offs. In this article from Redfin, we’ll delve into how LPMI functions, how it compares to traditional PMI, who it suits best, and how to determine if it’s the right choice for your specific situation.

Understanding lender-paid mortgage insurance (LPMI)

Lender-paid mortgage insurance (LPMI) is when the lender covers your mortgage insurance premium upfront on your behalf, eliminating the need for a monthly PMI payment. However, in exchange, the lender charges you a higher interest rate for the duration of the loan.

Essentially, LPMI is integrated into your mortgage rate. While you save on monthly PMI expenses, you end up paying more in interest over the long run.

How LPMI operates

LPMI can be structured in two primary ways:

1. Single-premium LPMI (most common)

The lender pays a one-time upfront PMI premium, and you accept a slightly higher interest rate.

2. Lender-financed LPMI

The lender finances the cost into the loan or adjusts the rate even higher to account for ongoing premiums.

Regardless of the structure, both forms of LPMI ultimately raise your interest rate to cover the expense. It boils down to a trade-off:

• No monthly PMI expenses
• But a permanently higher mortgage rate

What is borrower-paid PMI (BPMI)?

Before delving into the comparison between LPMI and BPMI, it’s beneficial to comprehend how traditional PMI operates.

Borrower-paid PMI (BPMI) is the standard form of mortgage insurance that most buyers opt for when putting down less than 20% on a conventional loan. With BPMI:

• The borrower covers a monthly PMI fee, added to the mortgage payment
• The cost varies based on credit score, loan type, and down payment
• PMI can be eliminated later, typically upon reaching 20% equity
• It offers lower interest rates since PMI isn’t built into the rate

This is the type of PMI that most homebuyers encounter—it’s a separate line item on the monthly mortgage bill until the loan reaches a specific equity threshold. In certain instances, you may be able to request early PMI removal with a new appraisal, depending on your lender’s policies. Once removed, you continue paying the same lower interest rate.

LPMI vs. Borrower-Paid PMI (BPMI)

Here’s a comparison between LPMI and the more conventional BPMI option that most buyers encounter:

In most cases, BPMI is more cost-effective over the life of the loan, whereas LPMI can be advantageous in the short term if you’re focused on monthly affordability.

Illustration: LPMI vs. BPMI Cost Analysis

Scenario:

• $450,000 property price
• 5% down payment ($22,500)
• 30-year fixed-rate mortgage
• Buyer has good credit

With BPMI

• Interest rate: 6.5%
• Monthly PMI: $140–$200 depending on credit rating
• PMI is removed once you hit ~20% equity (approximately 5–8 years)

With LPMI

• Interest rate: 6.875%
• No monthly PMI
• Higher rate leads to increased interest payments over time
• No option to eliminate the higher rate

In the initial 2–3 years, the LPMI alternative might marginally reduce monthly expenses, although this isn’t always guaranteed—your PMI rate determines whether LPMI genuinely decreases the payment. Over the loan’s duration, BPMI generally emerges as the more financially viable option.

Utilize Redfin’s mortgage calculator to estimate how PMI impacts your monthly payment and compare it with a scenario involving a higher-rate loan.

Pros and cons of LPMI

Pros

• No monthly PMI payment — reduces your initial housing expenses
• Potentially lower monthly payment when compared to a loan with BPMI
• May aid in easier qualification as the monthly debt burden is reduced
• Simpler payment structure with all expenses rolled into the mortgage rate

Cons

• Higher interest rate throughout the loan term
• No option to remove PMI — the elevated rate cannot be dropped once you reach 20% equity
• Likely more expensive in the long run
• Refinancing may be necessary to eliminate the higher rate

Instances where LPMI might be a suitable option

LPMI could be a viable choice if:

• You desire the lowest monthly payment at present
• You’re confident about refinancing in a few years
• You don’t intend to hold onto the mortgage for an extended period
• You need a lower debt-to-income ratio to qualify for the loan
• You prefer a predictable, all-inclusive monthly payment without PMI charges

Instances where LPMI is not advisable

LPMI typically isn’t the best choice if:

• You plan to reside in the property long term
• You desire the option to eliminate PMI later on
• You prioritize lifetime savings over short-term savings
• Your credit score qualifies you for low-cost monthly PMI (often cheaper than LPMI)

Determining if LPMI is a worthwhile choice

Before opting for LPMI, consider the following:

• How long will I retain this mortgage? If you’re likely to refinance or sell within a few years, LPMI could help you save money in the short term.

• What’s my PMI expense? If your PMI estimate is low (particularly with good credit), BPMI is typically the superior option

• Do I prioritize monthly affordability or long-term expenses?

1. 1. • LPMI = lower current monthly payment
      • BPMI = typically lower overall cost

• Can I qualify more easily with LPMI? No PMI might improve debt-to-income ratios.

Alternatives to LPMI

If you’re looking to avoid or reduce PMI, here are other avenues:

• Split-premium PMI: Pay a portion of PMI upfront and the rest monthly.
• Single-premium BPMI (borrower-paid): Pay a single upfront PMI fee without increasing the interest rate.
• Providing a 20% down