Lender Paid Mortgage Insurance – How Does it Really Work?

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Lender paid mortgage insurance is paid upfront by the lender so no monthly amount is needed. However, as with many things in the mortgage business, that is not the whole truth.

You may have been told some loans do not have mortgage insurance as long as you pay a higher rate. That is only part of the story.

Lender Paid Mortgage Insurance – Not Quite True

Any loan above 80% loan to value has mortgage insurance. You either pay the mortgage insurance in the form of monthly payments included in your mortgage payment or you pay upfront in one lump sum.

But wait! Why is it called lender paid mortgage insurance if it looks like you are paying either way? Where does the lender come in?

For lender paid mortgage insurance, the lender charges you an add on. You can pay that upfront or increase your rate and use the money that generates to pay it. So if you asked what the add on was for LPMI, you could decide if you wanted to pay that upfront as part of your closing costs or accept a higher rate each month.

The lender uses the money created from increasing your rate to pay the mortgage insurance. So, as with so many things in the mortgage business, you are the one paying. No one ever pays anything on your behalf without collecting something from you somehow.

Originators do not want to open the door to the add on talk so they just jack up the rate and tell you that is your only option. The industry’s job is to sell you a mortgage so they push a snappy sounding loan program like “lender paid” that gets you excited and closing. But it is not always the best choice for you.

Lenders mortgage insurance calculator programs are out there on the web.

But they are super hard to use for someone who is not in the mortgage industry. Trying to figure this out on your own will be hard.

So, you need to ask your loan officer or broker to run the numbers and depending on how long you will be in your home, together you can use all the information to decide what is best. Not just the information that sounds the best.

Just remember, you (the borrower) are always paying the mortgage insurance. You either pay monthly with the mortgage insurance being added to your payment, you pay monthly with a higher rate, or you pay the add on amount at closing.

Good Luck!