Lender-paid mortgage insurance does not mean that the lender pays for your mortgage insurance and you don’t pay. It means the lender pays the mortgage insurance on your behalf, and you pay in the form of a higher mortgage rate. For example, if you have a rate of 3.75%, you agree to pay 4% with no mortgage insurance paid out-of-pocket. It is similar to a no-cost refinance where the lender pays the closing costs and you get a higher interest rate.
Advantages of Lender-Paid Mortgage Insurance
The main advantage of lender-paid mortgage insurance is that you don’t pay mortgage insurance premiums. In some cases, this means you get a lower monthly mortgage payment. LPMI can save money if you don’t plan to stay in your home very long, or if you’re planning to refinance. If you go with LPMI, you may qualify for a larger loan amount on the purchase of a higher priced home because the monthly payment can be lower. A lower payment means you can get more loan for your income level. Another advantage is the potential for a bigger tax deduction because you’re paying more interest each month. If you earn more than $100k annually, how much you can deduct starts to decrease, which makes LPMI a good option.
Disadvantages of Lender-Paid Mortgage Insurance
The main disadvantage of lender-paid mortgage insurance is that it cannot be terminated. Since LPMI is build into the interest rate, it is permanent until you sell or refinance your home. You are fastened to a higher interest rate for the life of the loan, which means you end up paying more interest. If you keep your mortgage until the end of its term, you will pay more with LPMI, even factoring in the tax deduction.