Lender’s mortgage insurance (LMI), also known as private mortgage insurance in the United States, is a type of insurance policy on a home loan that covers lenders against potential losses in case borrowers are unable to repay the debt. This is one of many costs potential homeowners will have to consider when buying a home.
While homeownership frees owners from some concerns renters face utilities and difficult landlords, they take on responsibilities like home insurance, down payments, and mortgages. It’s also important to distinguish LMI from mortgage protection insurance, which protects homeowners and their families in case of illness, injury, or even death resulting in an inability to pay their monthly rates. LMI does nothing to protect you as a homeowner and exists solely to protect lenders.
Why should I get it?
Technically, your lender will choose which insurance company and policy they want to go with, and you’ll be charged with the costs of the policy. The most likely reason you would need the insurance is if you’re unable to afford a 20% security deposit on the home and need to be approved for a loan some other way. Many factors will determine whether lenders are willing to offer you a home loan, including your credit score, your debts and income, and your down payment.
You’re probably asking “how much does LMI cost?” It depends on several factors including the length of your mortgage, your down payment, the size of the home, and whether you’re a first-time homebuyer or not. LMI households can generally expect to pay at least $2,000, but costs can easily reach $10,000 and beyond. Unlike in the United States, where homeowners can pay off their LMI costs in monthly premiums, LMI costs are traditionally paid upfront in Australia. This may be difficult for low-income families, who are more likely to need the insurance to get approved in the first place. In this case, the costs can be incorporated into your home loan, so you can be it off as part of your mortgage payments.
Those in the LMI population also need to remember that will impose additional stamp duty on lender’s insurance on top of the stamp duty they’ll already pay on their home. The percentage will vary based on your state, but it’s generally between 9-11% with the exception of the Australia Capital Territory which won’t charge an additional percentage.
How Do I Avoid It?
The only sure-fire way to avoid these fees is if you can build up a 20% deposit since most lenders won’t consider borrowers who do this to be great risks. The best way you can do this is simply through effective budgeting and staying educated on all the fees associated with buying a home before you start looking seriously. You can use stamp duty and loan calculators online to determine how much home you can truly afford and budget appropriately based on your intended lifestyle. On the subject of insurance, don’t forget about important home insurance types you’re likely to need when you become a homeowner. You’ll need to consider the fees for these as well.
Dwelling Coverage: This is the basic type of homeowner’s insurance. This covers the building itself as well as any built-in appliances and is generally good for things like fires, smoke damage, storms, and vandalism. You may need to take out additional coverage to protect against floods and less common disasters depending on your area.
Contents Coverage: This is similar to renters insurance you may get to cover your belongings. This insurance covers your personal belongings either for total replacement costs or up to a certain value depending on your policy.
Personal Liability: This coverage protects you in case of injuries or other incidents on your property. The last thing you need is to be held responsible for medical bills or other damages you can’t afford because of an accident in or around your home.
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