Lender Paid Mortgage Insurance

The conventional mortgage lenders started offering lender paid mortgage insurance some time ago. Insurance is paid by the bank, not by the borrower. In return borrower pays higher interest rate and has one loan which is fully tax deductible. 

To explain this concept better, consider this example:

You buy a property for $150,000 with down payment of only 10% or $15,000. Normally you would have one loan for $135,000 and pay mortgage insurance.

Or you would break $135,000 on two mortgages - $120,000 and $15,000 respectively, which is called 80/10/10 piggyback mortgage and explained in "no private mortgage insurance" page.

The Lender Paid Mortgage Insurance (LPMI)  is convenient and less expensive than other options, especially if you obtain fixed rate mortgage (FRM) instead of adjustable rate mortgage (ARM). The tables below show the typical interest rate increases for both cases - fixed and adjustable, depending on LTV and FICO credit score.

ARM LPMI with FICO >= 680

FRM LPMI with FICO >= 680

If in our example the interest rate is 6% for 30 year fixed mortgage, with borrower paid MI, then with LPMI the rate will be 6.25%. That is, if borrower has middle credit score 680 or higher.

*As you can see, LPMI gets rather expensive for ARMs with LTV over 90%. You need to calculate carefully what option out of three is better for you - one mortgage with tax deductible LPMI, one mortgage with non deductible MI or two mortgage option.

Many banks don't extend lender paid mortgage insurance to the borrowers with credit score below 680. Those which do, often offer LPMI only on fixed rate mortgages and charge premium rates, see the table below:

FRM LPMI with FICO >= 620

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