Understanding Lenders Mortgage Insurance
One of the things that people commonly overlook when setting up home loans is lenders mortgage insurance
. Since lenders mortgage insurance usually applies in cases where a down payment of 20% or less has been made, the vast majority of Australians end up having to pay it.What Is Lenders Mortgage Insurance?
Lenders mortgage insurance is a one-off insurance payment that is made by a borrower in order to protect lenders when providing a home loan. It is used to insure the loan against any problems that may arise, including the possibility of a repossession or a failure to make the payments as agreed. Banks and other lending institutions take risks when providing mortgages, and lenders mortgage insurance is designed to mitigate those risks.
When Is Lenders Mortgage Insurance Necessary?
The average Australian who is buying a home is going to have to pay lenders mortgage insurance. That's because it is generally required on traditional home loans in which a deposit of 20% or less has been made. In the case of low document or non-conforming loans, LMI is usually required in cases when deposits of less than 40% have been made. This makes sense, since when a prospective home owner is able to make a large down payment, the lender has a lot more faith in their ability to make good on the loan.
Who Benefits From LMI?
One thing's for sure: Lenders mortgage insurance is not intended or designed to protect borrowers. Its focus is on lenders, and it is intended to protect their best interests. Mortgages get defaulted on all the time, and lenders are understandable wary. It should be noted, however, that if you repay your home loan or refinance it within two years, your LMI may be refundable. These are points that should be addressed with your mortgage broker, and it is important not to overlook a potential rebate if you are owed one.
How Much LMI Is Necessary?
Finally, when taking out a home loan it helps to have an idea about how much LMI you'll have to pay going into the deal. On 100% home loans - or mortgages in which no down payment is made - LMI rates can be as high as 3%. In the case of home loans that involve down payments of at least 5%, LMI rates typically fall into the 1.2% to the 1.5% range. As stated previously, home loans that include down payments of 20% of more don't usually require lenders mortgage insurance, and borrowers can save big that way.
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