Why LPMI is a Bad Deal and How to Avoid it

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Daniel CohenDec 14, 2010
Key Takeaways:
  • LPMI protects the mortgage lender in case of a borrower's default.
  • LPMI is not free; borrowers pay for it in the form of higher interest.
  • LPMI is a smart only if you plan to refinance.
Can I find LPMI in a mortgage refinance?

Can't find a bank that will do a refinance under the harp program for me because I have LPMI.

Can't find a bank that will do a refinance under the harp program for me because I have LPMI. Bank of America will not help at all. Can you tell me where I could I find a bank that will do the refinance with LPMI under the harp program?

Lender Private Mortgage Insurance (LPMI), is as its name suggests, mortgage insurance that protects the lender in case of a borrower's default. LPMI is a misnomer because the borrower pays for the insurance in the form of a slightly higher interest rate. Unlike PMI that the borrower pays for directly, with LPMI there is no automatic cancellation of the insurance charge once the borrower equals 22% equity. To eliminate LPMI, the borrower must refinance the loan.

LPMI has one potential advantage over PMI. As I write these words in late 2010, PMI is still tax deductible for homeowners earning less than $100,000. If you earn more than $100,000, then LPMI might be a smarter option. Congress has looked warily at PMI as a tax deduction for many years, and may eliminate it in the future. If Congress removes PMI as a deduction, LPMI will become more attractive because its cost is rolled into the interest rate. Note, however, that some in Congress want to eliminate the mortgage interest deduction altogether.

You are familiar with the old phrase, "There is no such thing as a free lunch." LPMI is not a free lunch — homeowners pay for LPMI in higher interest. It is also a bad deal if you plan to own your home long enough to exceed 22% of equity. Mortgage insurance is a bad deal anyway for homeowners because if they default the beneficiary is the lender. Upon default, the insurance provider often pursues the homeowner for the loss, which makes mortgage insurance an especially bad deal for homeowners.

Your LPMI Question

Lenders standardly require homeowners with less than 20% equity to buy PMI.

You are in a tough position. If you are applying for HARP, then it seems safe for me to assume that you either are underwater on your home or have very little equity. A standard refinance is not an option.

While my reading of the HARP guidelines do not show any Fannie Mae or Freddie Mac requirements that preclude a lender refinancing a loan with LPMI under HARP, it appears that lenders are making this decision on their own. Clearly, this limits the number of people who can take advantage of HARP, contrary to the announced goals of the program. (Editor's Note: President Obama announced on October 24th, 2011 some significant changes to HARP. While the final guidelines are yet to be released, it appears that the LPMI issue will be addressed, allowing borrowers who have been unable to participate in HARP to now do so. Check back at Bills.com, to stay informed about the new HARP rollout.)

It doesn't seem to me that you will get relief unless the government holds lenders' feet to the fire or revises the HARP program.

Take advantage of the information, tools, and resources in the Bills.com Refinance section to help you navigate these options. Once you have completed your research and are ready to find a great loan, use the Bills.com Savings Center to start your search.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com

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10 Comments

EEric, Apr, 2013
My wife and I bought a house through an employee benefit at the bank she was working for in '05. We have been trying to refinance for 1.5 years now just to take advantage of lower interest rates but the banks will not touch us due to LPMI. Any recommendations on how to remove it or work around it to get a refinance?
BBill, Apr, 2013
LPMI should not, in general, be the reason for not being able to refinance. A refinance is a new loan and the lender will require mortgage insurance only if your LTV is over 80%. In some cases, such as a HARP loan, the LPMI can be transferred or replaced with a new policy.

Check to see if you are eligible for a HARP loan. Also, check with the mortgage insurance company if they work with another lender. Carefully check your situation and see if you are having trouble due to your credit score, debt to income ratio, or loan to value ratio, or a combination of them.
KKurt, Feb, 2013
I currently refinanced with LPMI. Is in any way the higher interest rate deductible at all? Anything deductible with LPMI?
BBill, Feb, 2013
I can't give you tax advice, as only a tax professional can properly do so, but I will share my opinion.

If you have a mortgage loan for a qualified residence, then you can consider using the interest portion of your payment as part of your itemized deductions on your tax return. The fact that the loan has LPMI does not adversely affect your rights. For more information, read the Bills.com article about mortgage and tax deductions.
jjerry, Oct, 2012
I'm tying to lower my monthly payments so I can keep my home. I apparently refi'd in June 2009, so I don't qualify for HARP by 2 months. I'm not paying pmi now and was told to not take it on if you don't have to. I have an opportunity to refi with lpmi. Is that the way to go or is there something else I can consider?
BBill, Oct, 2012
Since you are not eligible for the HARP loan your options are limited. Lender's require mortgage insurance if your LTV is over 80%. The mortgage insurance comes in the form of borrower paid PMI or lender paid LPMI. There is no way of telling which offer is better, because the actual cost of the loan will depend on the interest rate, the closing costs and fees. You will need to judge the mortgage insurance premium on a borrower paid PMi vs. the additional interest rate charged on the LPMI based loan. My recommendation is to shop around for the best deal.