Lender-paid mortgage insurance (LPMI) is a type of home loan where the lender pays the mortgage insurance premium in lieu of the borrower

With LPMI, the borrower doesn't have to pay the mortgage insurance separately, or as part of the monthly mortgage payment. Instead, the lender pays the mortgage insurance premiums from up-front funds, and then charges the borrower a slightly higher interest rate to cover the cost.

The main benefit of LPMI is that it can help reduce the cost of a mortgage for borrowers who don't have the extra money available to pay the mortgage insurance premium on their own. Additionally, it can also reduce the amount of paperwork required since the lender is responsible for making the payments.

However, there are a few drawbacks to consider when contemplating taking out an LPMI loan. For instance, these types of loans typically come with a higher interest rate than traditional mortgages, which can increase the overall cost of the loan. Furthermore, the lender will likely factor in the cost of the mortgage insurance when assessing a borrower's creditworthiness, so borrowers with less-than-perfect credit may find themselves paying higher interest rates.

In addition, LPMI loans usually require the borrower to maintain an escrow account to pay for property taxes and insurance. This means that the borrower has to pre-pay the escrow account each month, in addition to their regular mortgage payment. This can be difficult for some borrowers who are trying to manage their monthly budget.

When considering whether or not to take out an LPMI loan, borrowers should weigh the pros and cons. On one hand, the elimination of extra paperwork and the potential for lower up-front costs can be attractive. But on the other hand, the higher interest rates and additional costs of escrow accounts can make it a more expensive option in the long run.

In summary, Lender Paid Mortgage Insurance (LPMI) is an agreement between the lender and borrower where the lender pays the mortgage insurance in lieu of the borrower. It can offer some benefits by reducing the cost of the mortgage, eliminating extra paperwork and potentially increasing the chances of approval, but it can also come with higher interest rates and require the payment of an escrow account. Borrowers should therefore weigh the advantages and disadvantages when deciding whether or not this type of loan is right for them.

This article was contributed on Aug 04, 2023