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Insurance Tips and Tricks

Insurance is confusing topic for an average american. Let's see if we can relate to this topic with a real life examples.

Lenders Mortgage Insurance: How It Works

Jack Halcombe Jack Halcombe , 11/26/2018
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Since real estate prices are currently hitting their lowest, it’s definitely advisable to take advantage of this trend. The house prices have started to decline, and if you’ve been thinking about buying a home, the present conditions are quite favourable. However, not everyone has saved up enough to buy a property, and that is where lenders mortgage insurance (LMI) kicks in.

Lenders Mortgage Insurance is what you need if you are unable to provide the required deposit at the moment of purchase. In case you are taking out a loan from a bank (or a different lender), they will ask for at least a 20% deposit of the overall loan sum. Should you have enough on your account, good for you – the new home is almost yours. If not, it’s difficult to say whether it pays off to stay another year or two in a rented home while the prices are dropping, or to take a risk and apply for a loan anyway, in which case you are bound to pay LMI.

For all those future homebuyers who haven’t saved up 20%, or they don’t feel like borrowing money from their family or friends, there’s the option of purchasing a home with even as little as 5% deposit. Basically, you are able to borrow as much as 95% of the property value (!). In such a situation, LMI would be obligatory, since you wouldn’t come across as the most reliable borrower, and the lender wants to secure themselves in case of a default.

Naturally, the amount of Lenders Mortgage Insurance varies depending on how much deposit you possess. The lower the deposit, the higher the insurance. To get some idea what your LMI could be like, you can use an online Lenders Mortgage Insurance calculator and see where you stand, or how much you would need to have if you don’t wish to pay too high an insurance. The location of your future property is also taken into consideration when doing the calculations.

As for how you are going to pay for LMI, there are several options to consider, once again depending on a particular lender and your financial abilities. 
- First of all, it can be paid upfront at the loan settlement. You can decide to pay the lump sum and be left only with monthly loan instalments. - Another option would be to have the yearly sum divided into monthly instalments.
- Interestingly enough, some lenders can even assist you with the insurance. For instance, in cases when a borrower cannot pay LMI to an insurer, the lender may buy off the coverage from them and charge you a higher interest rate in return.

         Either way, if a borrower is faced with a situation in which they are unable to pay the regular instalments, they have the obligation to contact their lender. There are solutions for borrowers experiencing financial hardships, but they had better react on time and present their case timely before it’s too late.

On the other hand, if you pay off your mortgage before the deadline, there are options for LMI to be refunded, but it depends on many factors. It’s not always possible, but it’s definitely worth asking about, prior to your decision about the choice of a lender.

Taking everything into account, it has to be emphasised that getting LMI is serious business. It is the only way for future homeowners who are lacking a 20% deposit, and they don’t wish to have a guarantor or get indebted to their family and friends. Another solution would be opting for a cheaper home. However, borrowers are certainly becoming more indebted since they have to count on paying LMI and loan instalments regularly. It seems like a bit of a daunting prospect, doesn’t it? Either way, that is exactly what plenty of Australians have been applying and have been getting approved for in recent years. The whole system seems to be working just fine, and the risk factor is something you have to get used to when thinking about getting a home loan.

Every borrower’s situation is completely individual, and you should regard it as such. Take your time to do proper research and check all the options before making the final call. With the current state in the market, there is a myriad of lenders to choose from, and luckily for you, they are in fierce competition as well.