Is lenders mortgage insurance a necessary evil for homebuyers?

by Chris Lang on November 7, 2010

Worried man Today, thanks to our guest poster Kristy Sheppard from Mortgage Choice, I have an article for you that will explain how lenders mortgage insurance works and how it allows you to borrow more than you normally would be able to.

Personally, I am against borrowing more than 80% of the house value, but we all are different people, living different lives, facing different hardships and making choices accordingly. And one of the very important things about choice is to make an informed choice – so have a read, and perhaps you will learn a thing or two about lenders mortgage insurance.

Is lenders mortgage insurance a necessary evil for homebuyers?

A large number of first home buyers searching for a home loan don’t understand how lenders mortgage insurance (LMI) works.

Too often, homebuyers shopping around for a home loan mistakenly believe that LMI covers them for a missed payment. But it’s important that borrowers understand the insurance does not provide any protection to them.

In fact, LMI is a one-off payment to the lender (or lender’s insurer) that insures the mortgage if you are looking to borrow over a certain percentage of the property price.

Therefore, the payment actually insures the lender for any shortfall on a home loan so if you default on your mortgage, the insurance will cover the difference between what your property is sold for and the amount still outstanding on the home loan.

Lenders mortgage insurance is necessary when you’re borrowing more than 80% of the value of the property.

But depending on which mortgage lender you go with, you may be able to borrow as much as 85% without having to fork out LMI.

Lenders mortgage insurance is based on the loan to value ratio (LRV) and is a percentage of the borrowed amount.

When shopping around for a home loan, make sure you bear in mind that some lenders allow you to add this fee to your mortgage, while others expect you to fork out for it out of your own pocket.

Ultimately, whether or not the amount can be added to your mortgage can make a big difference to how much deposit you need to save.

The question borrowers need to consider is whether or not they’re better off saving that first 20% of the loan before shopping around as real estate prices and interest rates rise, or whether to fork out for lenders mortgage insurance and get into the real estate market now.

Lenders mortgage insurance is a big help to borrowers as without it, buying a property would be out of reach for many people as they would have to save a deposit up to 20% of the purchase price, plus the costs associated with buying property. With LMI, the required deposit is generally 5% to 10% of the property price.

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