| -link"> | | | | benefits to the mortgagor, it doesn't cover the |
| | | | mortgagor against loss ensuing from foreclosure. LMI |
| Two questions frequently asked, are "What is Lenders | | | | ONLY INSURES THE MORTGAGEE as in effect, |
| Mortgage Insurance?" and "Will I need it when | | | | they are the beneficiary of the insurance policy! In the |
| Refinancing a Home?" | | | | event of a claim for loss, the lender will collect the |
| In this article I will explain what Lenders Mortgage | | | | proceeds from the LMI claim, not the mortgagor. Any |
| Insurance is, how it works and influences you when | | | | loss ensuing from foreclosure, regardless of LMI, is a |
| Home Refinancing. | | | | loss incurred by the borrower and will remain as such. |
| The function of Lenders Mortgage Insurance (LMI) is to | | | | The only difference being is that the mortgagor's legal |
| save the home loan lending insttution from incurring a | | | | responsibility to the finance provider for the loss will |
| deficit of money in the incident of a borrower | | | | move as a legal responsibility to the LMI provider for |
| defaulting on their mortgage, resulting in foreclosure | | | | the loss in the episode of an LMI claim by the lender. |
| and a subsequent mortgagee sale. If the proceeds | | | | Who pays the LMI Premium? |
| from the mortgagee sale are not enough to pay back | | | | The LMI provider's contract of insurance is with the |
| the home loan in full, LMI will meet the loss for the | | | | lender and the premium is payable by the lender |
| mortgage lender. | | | | however in certain situations the lender may pass on |
| LMI shouldn't be confused with Mortgage Protection | | | | the cost of the insurance to the borrower as a cost of |
| Insurance (MPI), which protects a borrower against | | | | providing the home loan. |
| their incapacity to repay their loan in the event of an | | | | A mortgage where a deposit or equity of less than |
| unforeseen circumstance like unemployment, illness or | | | | 20% is permitted means a higher risk to the lending |
| death. MPI covers payment of your home loan | | | | institution, and in this case the lending institution will |
| instalments and/or your loan balance. CPI insurance is | | | | usually pass the cost of LMI on to the mortgagor as a |
| not mandatory and is exclusively the choice of the | | | | fee for them being able to get a loan that they would |
| borrower. The premium for CPI is paid annually and | | | | normally not have been able to get. |
| usually varies based on the size of the home loan. | | | | What is the cost of Lenders Mortgage Insurance and |
| | | | | how is it paid? |
| Why is Lenders Mortgage Insurance required? | | | | The premium for LMI is a one off premium due upfront |
| Lenders including Banks, Building Societies, Credit | | | | on the day of settlement of the homeloan with |
| Unions and non-bank lenders, either use cash from | | | | payment of the premium being the responsibility of the |
| deposits held in savings accounts and term deposits, or | | | | lending institution. The lending institution will subtract the |
| borrow funds to provide mortgages to borrowers for | | | | premium from the home loan proceeds if and when |
| home refinancing, purchasing, construction or equity | | | | the cost of LMI is to be met by the mortgagor. |
| purposes. By using other peoples' cash to fund | | | | |
| mortgages, the lending institutions form an obligation to | | | | The premium cost will differ depending on the amount |
| repay that cash to the suppliers of the money while at | | | | of the home loan and the ratio of the home loan size |
| the same time taking on the risk that they may not | | | | to the value of the security i.e. Loan to Value Ratio |
| receive all or some of the funds back that they loan. | | | | (LVR). The higher the LVR the more expensive the |
| | | | | premium, also the bigger the homeloan amount the |
| Even though they hold property as security for the | | | | more costly the premium. |
| home loan, the value of the real estate may decline | | | | Are the providers of LMI sound? |
| due to market forces, contagion or damage to the | | | | LMI providers work under strict government regulation |
| improvements, ending up in the security not having | | | | to ensure they maintain adequate liquidity to meet |
| sufficient value to cover the amount of the home loan. | | | | claims, as well as hold adequate funds in reserve, in |
| To offset their obligations to the suppliers of the | | | | the event that a large number of claims are made in a |
| mortgage funds, the lending institutions take out LMI to | | | | short period of time or increase substantially. |
| cover any probable loss. | | | | How is Lender's Mortgage Insurance arranged? |
| | | | | The granting of LMI is not automatic and has to be |
| Do I benefit from LMI? | | | | applied for by way of application to the LMI provider. |
| Before LMI was available, lending institutions desired | | | | Should your home refinancing necessitate LMI, your |
| borrowers to possess a deposit of no less than 20% | | | | Mortgage Broker, Planner or Mortgage Consultant in |
| when buying a dwelling or equity of 20% when | | | | conjunction with the lender, will prepare all the |
| refinancing a home to minimise the risk of lending and | | | | obligatory documentation and present you with all the |
| shield them against potential loss in the event of | | | | information about the application procedure. |
| foreclosure. Nowadays with the ability to pass on the | | | | Provided the borrower, homeloan structure, home |
| risk of loss to an insurance company through LMI, | | | | refinancing purpose and security property meet with |
| lending institutions are prepared to agree to a lower | | | | the appropriate LMI provider underwriting guidelines an |
| deposit for purchases and less equity for refinancing a | | | | LMI Certificate of Cover will be issued to the finance |
| home. | | | | provider. |
| Also, if lenders did not use LMI to mitigate lending | | | | As you can understand, Lenders Mortgage Insurance |
| losses, then those losses would need to be recouped | | | | does offer some benefit to the borrower in the form |
| from the profits of other mortgages, in effect | | | | of lower interest rates however it is chiefly used as a |
| increasing mortgage interest rates. To stay away | | | | risk mitigation tool by the lender. When refinancing a |
| from this, lending institutions opt to take out LMI and | | | | home the benefit of LMI is greatest when the security |
| have the insurance provider take on the risk and wear | | | | property equity is less than 20% as the mortgagor |
| any loss. | | | | would generally not be able to obtain such a loan. |
| | | | | However that increased benefit arrives at a price in |
| By lenders using LMI, the advantage to borrowers is | | | | the form of increased home refinancing expenses. |
| that they are able to purchase a property using a | | | | So when refinancing a home it is important to |
| smaller deposit or refinance a house with less equity | | | | preserve as much security property equity as possible, |
| and/or get lower interest rates than they would | | | | in effect reducing the price tag and/or requirement for |
| otherwise be able to do with no LMI. | | | | LMI and balance the worth being achieved from the |
| Please note, that even though LMI will give some | | | | home refinance with the price of LMI. |