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Lender Paid PMI Mortgage Rates in 2024: What You Need to Know

With mortgage rates rising throughout 2022, many prospective homebuyers are keeping a close eye on rates and looking for ways to get the best possible deal. One option that could help lower your monthly payment is a lender-paid mortgage insurance (LPMI) loan.

In this in-depth guide, we’ll explain what LPMI is, how it works, and whether it could be a good fit for your home purchase plans in 2024. By the end, you’ll have a thorough understanding of this type of loan and how it compares to other financing options.

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Let’s get started!

What is Lender Paid PMI?

Private mortgage insurance PMI is mandatory on conventional home loans when the down payment is less than 20% of the purchase price. It serves as collateral should the borrower default.

With a traditional PMI loan, the borrower pays the upfront and monthly mortgage insurance costs out of pocket. The lender-paid PMI (LPMI) shifts this cost to the lender. Instead of charging a slightly higher interest rate on the loan, the lender pays the one-time and ongoing PMI costs internally.

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So, in summary:

  • PMI is insurance that safeguards the lender if you fail to pay your mortgage with less than 20% down.
  • With traditional PMI, you pay the costs.
  • With LPMI, the lender pays the upfront and monthly PMI costs instead of charging a higher rate.

How Can Lenders Afford to Pay PMI?

You may wonder how lenders can afford to absorb the cost of PMI themselves. The answer comes down to interest rates.

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By paying the PMI costs upfront instead of charging a slightly higher rate, lenders are able to offer slightly lower advertised interest rates to attract more borrowers. This helps increase their loan volume and overall profits.

While the individual LPMI loan may have a slightly reduced yield for the lender compared to a loan with a higher rate, a larger volume makes up for those smaller margins; it’s a trade-off lenders are often willing to make.

Determining LPMI Loan Eligibility

Not every borrower will qualify for an LPMI loan. Lenders consider various risk factors like yours:

  • Credit score
  • Debt-to-income ratio
  • Loan-to-value ratio
  • Employment history
  • Asset verification

In general, you’ll need solid credit (680 FICO or higher) and must meet the lender’s standard underwriting guidelines. However, requirements can vary between banks and mortgage companies.

It’s always best to get prequalified with specific lenders to see their exact LPMI eligibility rules. Don’t assume you’ll automatically qualify just because you’re interested in this type of loan.

Comparing LPMI Rates to Normal PMI Loans

Now, let’s look at a direct comparison between LPMI and traditional PMI loan terms:

Interest Rates

As we mentioned, LPMI rates will generally be slightly below standard mortgage rates since lenders won’t add that small increment to cover PMI costs. The difference is usually 0.125% or less.

For example, in March 2022, the average 30-year fixed rate was 4.67% for LPMI vs 4.8% for standard loans requiring PMI, according to data from Freddie Mac.

Mortgage Insurance Costs

With LPMI, you avoid any upfront or recurring monthly PMI payments deducted from your mortgage statement. The lender absorbs 100% of insurance charges.

Loan-to-Value Ratio

Both LPMI and traditional PMI loans allow down payments as low as 3%. So, the minimum loan-to-value (LTV) threshold is the same at 97%.

Canceling PMI

For either loan type, you can request PMI cancellation once you’ve paid down your mortgage balance to 80% of the original home value based on an appraisal. So, equity thresholds are identical.

Closing Costs

Closing costs are generally comparable between the two. LPMI may carry a small additional lender fee to cover their PMI expenses, but overall settlement charges remain similar.

So, in summary, the key differences are:

  • Slightly lower interest rate with LPMI
  • No PMI payments for the borrower
  • All other terms, like LTV/equity rules for canceling PMI, are the same

When is an LPMI Loan Most Advantageous?

Now that we’ve reviewed the mechanics let’s examine the types of home-buying situations where LPMI could make the most financial sense:

Tight Budget

If coming up with a large down payment and paying monthly PMI is a strain, LPMI takes those added expenses off your plate. The rate savings may outweigh closing costs.

Short-Term Ownership

LPMI can benefit those who only plan to stay five years or less since lower rates may offset closing costs sooner versus traditional PMI.

Multiple Mortgages

If purchasing a second home or rental property with less than 20% down, LPMI can minimize carrying costs versus paying PMI on multiple loans.

Competitive Market

In hot housing markets where homes sell fast, an LPMI preapproval may help win a bidding war versus a traditional PMI loan that takes longer to process.

Of course, personal situations vary. But in general, LPMI works best when minimizing upfront costs and short-term payments is a top priority versus long-run interest savings. Be sure to crunch the numbers with a loan officer or mortgage calculator.

Factors That Favor a Standard PMI Loan

While LPMI offers clear advantages in some cases, a traditional PMI loan may be a better fit depending on your unique financial situation and goals. Some scenarios where standard PMI could come out ahead include:

Long-Term Ownership

If you plan to stay in the home for 15+ years, the cumulative higher interest costs of an LPMI loan may exceed what you’d pay in PMI premiums – especially if housing values increase, allowing you to remove PMI early.

Large Down Payment

Putting 10-19% down minimizes monthly PMI, so the slightly lower LPMI rate may not offset ongoing premium costs. Standard PMI could win out.

Tight Debt Ratios

Borrowers with DTI ratios very close to lender limits may only qualify for standard PMI versus LPMI’s stricter guidelines, making it the only option.

Lower Appraisal

If there’s a risk the home won’t appraise for the sale price, leaving less than 20% equity, PMI cancellation may take longer – favoring a standard loan to remove PMI sooner.

As always, carefully modeling different scenarios is important before deciding. Make sure to factor in your goals, timelines, and risk tolerance as well. With either option, getting preapproved aids the homebuying process.

Optimizing an LPMI Transaction

For buyers pursuing an LPMI loan, here are some additional tips for maximizing savings and structuring a successful transaction:

Shop Multiple Lenders

Just like standard loans, get quotes from several banks and credit unions to ensure you find the lowest LPMI rate available. Competition drives better deals.

Negotiate Closing Costs

See if lenders will credit back part of their LPMI fee at closing or offer lender credits to offset other settlement charges.

Make Additional Payments

Putting more than the minimum toward principal each month can help you reach 80% equity faster to remove LPMI earlier than scheduled.

Ask About Rate Locks

Consider an LPMI lock if buying in a rising rate environment as insurance if rates increase before your closing date.

Use LPMI in an Appraisal Gap Waiver

Some lenders let borrowers use an LPMI loan to cover gaps between the purchase price and lower appraised value without extra fees or costs.

With proper planning and shopping around, an LPMI mortgage could be an excellent way to purchase your home at a competitive rate while minimizing upfront costs in 2024. But only pursue it if the numbers make long-term sense for your situation.

What Are Mortgage Rates Likely to Look Like in 2024?

Now that we understand how LPMI works let’s turn our attention to potential mortgage rate movements in 2024 to get a sense of the environment homebuyers may face.

Throughout 2022, rates rose substantially due to high inflation and the Federal Reserve responding with aggressive rate hikes. The average 30-year fixed was well over 7% by late in the year.

Most analysts predict rates will remain higher than their ultra-low pandemic levels through 2023 but could moderate somewhat in 2024 as inflation hopefully eases:

  • The Fed is expected to keep raising rates, though possibly at a slower pace, keeping mortgage products elevated in a range of 6-7%.
  • If inflation rolls over as expected and the economy avoids a major downturn, rates could retreat to 5.5-6.5% on average across 2024.
  • Signs of continued wage growth and a hot jobs market may keep some upward pressure on rates despite better inflation metrics.
  • Global factors like central bank actions overseas or economic turmoil abroad could also influence U.S. rates one way or the other independent of domestic trends. Geopolitical risks add to the uncertainty.
  • Mortgage-backed securities purchases by the Fed could provide some underlying support and limit rate volatility and spikes even if they continue tightening. But they’ve also signaled rates may need to rise into “restrictive” territory to curb prices.

Overall, while a decline from 2022’s highs is expected, rates will likely remain elevated historically and unpredictable, given inflation’s path depends on many economic and geopolitical variables. Budgeting for the 6-7% range is prudent for 2024 homebuying plans.

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