4 PMI Types: BPMI, LPMI, Single Premium and Split Premium
What You Should Know
- There are 4 distinct types of PMI: Borrower-Paid Insurance, Lender-Paid Insurance, Single Premium Insurance, and Split Premium Insurance.
- Private mortgage insurance protects the lender in case of default by the borrower, and it is paid by the borrower when they contribute less than 20% towards the down payment.
- Every type of PMI has its benefits, and a borrower who knows the difference between them may be able to find the best insurance for their financial situation.
Private Mortgage Insurance Overview
Private mortgage insurance, also known as PMI, is insurance that is paid by a borrower and protects their lender in case the borrower defaults on their loan. Even though it does not benefit the borrower directly, it usually allows the borrower to contribute a down payment of less than 20% at the time of loan origination.
Lenders usually require mortgage insurance for borrowers and loans that are considered risky. One of the most common cases, when private mortgage insurance is required by the lender, is when a borrower has a loan with a loan-to-value (LTV) ratio above 80%. It is possible to cancel PMI down the road once the conditions for PMI cancellation are met. When a borrower is required to take it, they have to pay a certain premium for the insurance, which usually ranges from 0.5% to 2% of the outstanding principal. Generally, the premium is charged annually and is paid in monthly installments, but it is not always the case and depends on the type of private mortgage insurance.
Private mortgage insurance specifically applies to conventional loans. It is important to note that other types of government-backed loans have their own mortgage insurance, such as FHA MIP, that may differ in their fee structure as well as term structure from PMI. When it comes to private mortgage insurance, 4 distinct types of PMI have the same purpose, but they may have different conditions and fee structures.
Types of PMI
There are 4 types of private mortgage insurance that a borrower may be offered when looking for PMI. A borrower who understands how different types of PMI work may be able to better plan out their mortgage amortization strategy and ensure that they are getting the best deal for their financial situation and financial goals.
|PMI Type||Payment Structure||Annual Fee||Upfront Fee||Higher Interest Rate|
|Borrower-Paid Mortgage Insurance (BPMI)||Mortgage Insurance Is Paid Separately from Mortgage Payments|
|Single-Premium Mortgage Insurance (SPMI)||Mortgage Insurance Is Paid Upfront with a Single Payment.|
|Lender Paid Mortgage Insurance (LPMI)||Mortgage Insurance Is Paid by the Lender. The Lender Charges Higher Interest Rate.|
|Split-Premium Mortgage Insurance||A Part of Mortgage Insurance Is Paid Upfront, and the Rest Is Paid Periodically.|
BPMI is the most common private mortgage insurance type. Usually, when a borrower or a lender talks about private mortgage insurance, they imply borrower-paid mortgage insurance because it has the most familiar fee structure and conditions. In addition to that, when lenders estimate mortgage loan payments, they usually estimate PMI payments as if it was BPMI. BPMI charges an annual premium that usually ranges from 0.5% to 2% of the outstanding balance, and it is paid by the borrower in monthly installments alongside monthly mortgage payments. BPMI premiums are paid directly by the borrower, which allows the borrower to have a clear understanding of what they are paying for every month.
Borrower-paid mortgage insurance allows the borrower to choose the US private mortgage insurance company they want to work with, have a clear understanding of how much they are paying for the insurance, and decide how to cancel their mortgage insurance. Borrower-paid mortgage insurance can be canceled once the borrower reaches a certain LTV ratio. It is canceled automatically once the LTV ratio lowers to 78%, or the borrower can request the cancellation manually once the LTV ratio reaches 80%.
This type of mortgage is not as common as the previous one, but it is still possible to discuss the possibility of getting an LPMI with the lender. LPMI implies that the lender pays for the mortgage insurance, but the borrower should not get too excited about this type of deal. Even though the lender technically pays for the insurance, they make the money back by charging a higher interest rate on the loan. It is also likely that LPMI would be more expensive than BPMI because the lender will set a higher interest rate that cannot be canceled as easily as borrower-paid mortgage insurance. In addition to that, the lender will likely set the interest rate to make money for providing this service to the borrower since the borrower does not have to deal with private mortgage insurance.
When the borrower gets private mortgage insurance and pays for it, they can benefit from it in a few ways. The borrower can deduct their mortgage insurance premium from their taxes. In addition to that, they can also cancel the insurance once their loan-to-value ratio reaches 80%. When it comes to lender-paid mortgage insurance, it is not paid by the borrower directly. Since the lender pays for LPMI, the buyer cannot deduct this expense from their taxes, and they also cannot cancel the insurance or lower the interest rate on the mortgage once the LTV reaches 80%. It is important to note that even though the borrower with LPMI cannot deduct LPMI expense from the tax base, they can still deduct the interest expense from their tax base, which indirectly accounts for the insurance premium paid.
LPMI may seem to not have any benefits for the borrower, but it allows the lender to be more flexible with the conditions of the loan. For example, since the mortgage insurance premiums are distributed for the whole mortgage term, the borrower may be able to have lower monthly payments and get a larger loan as a result. A borrower who is considering LPMI should discuss it with their lender and compare the lender’s offer with the offers of other mortgage insurance brokers.
Single-premium mortgage insurance has only one premium payment that is paid upfront by the borrower. Unlike BPMI, the most common type of PMI, SPMI does not have any periodical charges that are paid in monthly installments. Instead, the borrower pays for the whole insurance at the time of closing. Usually, the borrower also has the option to roll the premium into the principal of the mortgage. This type of mortgage insurance is called single-financed mortgage insurance, and it may be a good option for people who cannot get a lender-paid mortgage premium but are looking for a simple way to distribute the cost of the insurance throughout the mortgage term.
SPMI may be a good fit for people who have enough cash to cover their down payment and closing costs as well as the SPMI fee. It may also fit people who do not have a high enough income to be eligible for a large enough mortgage. Monthly mortgage payments and other periodic payments must meet certain debt-to-income (DTI) ratio requirements to be eligible for the loan amount. Single premium mortgage insurance allows the borrower to prepay for the insurance and exclude the cost from their DTI ratio. This allows the borrower to get a larger loan, but they should also have enough money to cover the price of single-premium mortgage insurance.
Another important benefit of single-premium mortgage insurance is that it is usually cheaper than the total cost of BPMI or LPMI. Since the premium is paid in full at closing, there is relatively less risk for the insurer, which means that they are willing to accept a smaller payment. On the other hand, if a borrower is looking to sell the property shortly after purchasing and pay off their mortgage, it may not make sense to pay for the mortgage premium in full at closing. Ultimately, SPMI allows the borrower to keep their total monthly payments as low as possible by contributing a larger amount at the loan origination.
Split-premium mortgage insurance is the least common type of private mortgage insurance, but it still may benefit some borrowers. This type of mortgage insurance incorporates an upfront fee and an annual fee. An upfront fee is paid once at the time of closing on the house, and it is similar to the SPMI because it covers a large portion of the total cost of the insurance. Once the upfront fee is paid, the annual fees are paid similarly as they are paid with BPMI, but they are substantially lower because the borrower has covered a large portion of the mortgage insurance with the upfront fee.
Split-premium mortgage insurance allows the borrower to get low monthly payments and avoid contributing large amounts of money at closing. It is a good middle ground between BPMI and SPMI, and it may make sense for people who are looking for a cheaper mortgage insurance option but do not have enough money to fully cover SPMI.
What Is the Best Type of PMI?
Understanding what each private mortgage insurance type implies may help a borrower to get the best PMI for their financial situation. Any type of PMI has its tax implications, fee structure, payment timeline, and level of control. There is no single private mortgage insurance that would work best for every single borrower.
Even though borrower-paid private mortgage insurance is the most popular insurance option, it does not mean that it should be used by every single borrower. Any borrower who is looking to get private mortgage insurance should shop around and see what offers different insurance agents provide. In addition to that, borrowers who are looking for private mortgage insurance should consider alternative financing options that do not require PMI, such as piggyback loans.