When comparing PMI and lender-paid mortgage insurance (LPMI), the key difference is cost over time: PMI adds a monthly fee that can eventually be removed, while LPMI raises your interest rate permanently. PMI often saves more in the long run, especially if you build equity quickly. Choosing wrong impacts not just your wallet but also your future flexibility with refinancing, pulling equity, or investing.
What Are PMI and LPMI (Plain and Simple)
Since we’re comparing PMI vs. LPMI, here’s what we’re actually talking about:
- PMI: This is the extra fee you pay if your down payment is under 20%. You pay it monthly. Think of it as protecting the lender, not you.
- LPMI: Instead of paying monthly, the lender “pays” the insurance—but raises your interest rate to cover it. Sneaky, right?
So now you’re probably asking: Which one hits my wallet less? Let’s run through some real numbers and see what’s smart long term.
How Much Is This Really Gonna Cost Me?
This is the gold. Real math, real comparisons. We’re laying out PMI vs. LPMI over 5, 10, and 30 years.
| Scenario | Monthly PMI | LPMI (Higher Interest Rate) | Total Cost Over 5 Years | Total Cost Over 10 Years | Total Cost Over 30 Years |
|---|---|---|---|---|---|
| $300K loan / 3% PMI / 6.5% LPMI Rate | $225/mo | 7.0% | $13,500 | $27,000 | $81,000 |
| $300K loan / PMI drops after 5 years | $225/mo (goes to $0 after 5 yrs) | 7.0% | $13,500 | $20,000 (vs. $27K) | $61,000 (vs. $81K) |
Look at that 30-year number again. $81,000 (LPMI) vs. $61,000 (PMI with removal). Yeah. That’s $20K you could’ve used to fix up your kitchen, invest, or breathe a little easier each month.
So, Which One Should You Go With?
I’m not here to tell you what to do. I’m here to show you where the traps are and how to think through PMI vs. LPMI with eyes wide open.
If You Plan to Sell or Refi Within 5–7 Years:
- LPMI might save you upfront hassle. You’ll avoid monthly PMI payments if you’ve got a tight monthly budget and plan to move on soon.
- But remember that higher rate sticks until you’re out or refinance. That adds up even in 5 years.
If You’re Staying Long-Term:
- PMI can be removed. Usually when you hit 20% equity (which could happen in 5–7 years), your PMI disappears.
- Even if PMI stings now, it could mean big savings later, especially if home values go up and your equity builds quicker.
PMI vs. LPMI: The Human Side
I had a buddy, Matt, who picked LPMI because it felt “simpler.” No extra monthly fee. He bought a $400K home with 10% down. Three years later, interest rates dropped—he tried to refi. Boom. Problem—his higher LPMI rate locked him out of some of the better deals. Meanwhile, his neighbor, Lola, had PMI. After 5 years, her PMI dropped off, and she kept her original low rate. Lola’s winning now with a lighter mortgage bill while Matt’s regretting the “easy” path. PMI vs. LPMI isn’t just a numbers game—it’s about flexibility, too.
What No One Tells You
- PMI is often tax-deductible. Yep. It varies by income and laws change, but check with your CPA. LPMI? No tax write-off, because it’s embedded in your rate.
- LPMI locks in that higher payment for 30 years (unless you refi). PMI can vanish. Huge difference.
- LPMI calculators often mislead. They make the short-term look good, but don’t project out 10+ years. That’s where it eats you.
Other Real-Life Money Hits to Think About
Got kids? Want to invest in short-term rentals? Planning a flip with bridge loans down the road? Paying $100–$200+ more per month for LPMI could jam you up. That’s money you could be putting into other assets that grow instead of funding your lender’s vacation home.
FAQs
Can I get rid of PMI sooner?
Yep. PMI goes away automatically once your mortgage hits 78% of the original value—but you can request it at 80% if your equity increases faster.
Can I refinance out of LPMI?
Yes, but it only makes sense if rates drop or your credit improves. If your rate is already high, you may not benefit as much from refinancing. That higher baked-in LPMI rate sticks until you do.
What if I do a piggyback loan to avoid both?
That’s an option (aka 80/10/10 loan). Just know it comes with its own rules and risks. Great in some markets, not always ideal if second loan rates are high or you’re tight on reserves.
PMI vs. LPMI—which is better when I want to pull equity later?
PMI keeps your rate lower. That could help you later when you want a HELOC or another loan based on equity.
Real Talk: What’s the Cost of Picking Wrong?
The cost isn’t just dollars—it’s flexibility. It’s the difference between refinancing when rates drop or being stuck. Between qualifying for a second property or not. PMI vs. LPMI is no small choice. Here’s the mindset I keep: Every 0.25% in interest equals thousands in extra cost over time. Choosing the wrong mortgage insurance route quietly multiplies that cost.
Next? Check These Out:
- Smartest Down Payment Strategies in 2024
- Hidden Mortgage Hack: Cut Years Off Your Loan
- Is Buying a House Even Worth It Anymore?
Conclusion
When it comes to PMI vs. LPMI, the decision is more than just a numbers game—it’s about your financial flexibility and long-term goals. While LPMI might seem appealing for the short-term convenience of no monthly payment, the long-term cost is steep with that higher interest rate sticking around. PMI, on the other hand, offers the opportunity to remove the cost once you hit 20% equity, potentially saving you a significant amount over time, especially if you plan to stay long-term.
