Buying a new home or even a first home has never been a better idea than right now. Interest rates are at never before seen lows. In fact, it costs less in terms of interest now than it did in the 1950s for new homeowners. But if you do not have at least 20% of the purchase price of your home as a down payment, then you may be aware that you will be required to purchase PMI in order to be approved for a home loan.

Because of this, many borrowers find that the monthly payment commitment can become too much for them to agree to, often tacking on an additional $50 to $300 a month extra – a cost that many homeowners simply cannot afford. One available option for those who cannot come up with a 20% down payment is to go with lender paid mortgage insurance or LPMI.

How Lender Paid Mortgage Insurance Works

LPMI is where the lender waives the requirement of PMI in exchange for assessing a higher rate of interest. While paying more interest is not something that you typically want to do, many borrowers that cannot meet the demands of a down payment that is requested at 20% find this a feasible option in order to obtain financing. Another added benefit to going with lender paid mortgage insurance is that you do not risk raising your monthly payments to a level that you cannot afford. In fact, going with lender paid mortgage insurance instead of PMI can actually lower your monthly payment.

PMI vs. LPMI – An Example

Let us have a look at the difference between these two options (PMI or LPMI) on a $200,000 mortgage financed over a term of thirty years at a fixed rate. The necessary down payment on a mortgage of this size under the 20% rule would be $10,000.

Under the home loan that is financed requiring PMI, we will assume a thirty year fixed rate of around 5.6%, making the payment amount range around $1250. The same loan written with lender paid mortgage insurance under the same term of thirty years at a rate of 6.4% would have a payment of around $1180 a month. Basically, the lessened interest for the mortgage that requires private mortgage interest costs makes the lender paid mortgage insurance loan less, even though the lender is requiring a higher rate of interest.

Under this example, the mortgage loan payment difference is around $70 a month, for a combined yearly reduction in payment amount of around $850. In this regard, paying more interest is evened out in the end by avoiding paying private mortgage insurance.

As you can see, there can be benefits to be reaped by avoiding private mortgage insurance. Be sure to check with your lender to see how you can save with the option of lender paid mortgage insurance; you will keep more of your monthly income in your pocket and avoid paying a huge down payment.

Kate Ross has a Master in Finance and has been a university teacher as well as a financial consultant for years. She specializes in Unsecured Loans and also in helping people to get approved for Guaranteed Loans for Bad Credit, home loans, guaranteed loans, bad credit auto loans, guaranteed credit cards among many other financial products. For further information, please visit SpeedyBadCreditLoans.com.