What is Lenders Mortgage Insurance and when Refinancing a Home, do I need it?
Two questions frequently asked, are "What is Lenders Mortgage Insurance?" and "Will I need it when Refinancing a Home?"
In this article I will explain what Lenders Mortgage Insurance is, how it works and influences you when Home Refinancing.
The function of Lenders Mortgage Insurance (LMI) is to save the home loan lending insttution from incurring a deficit of money in the incident of a borrower defaulting on their mortgage, resulting in foreclosure and a subsequent mortgagee sale. If the proceeds from the mortgagee sale are not enough to pay back the home loan in full, LMI will meet the loss for the mortgage lender.
LMI shouldn't be confused with Mortgage Protection Insurance (MPI), which protects a borrower against their incapacity to repay their loan in the event of an unforeseen circumstance like unemployment, illness or death. MPI covers payment of your home loan instalments and/or your loan balance. CPI insurance is not mandatory and is exclusively the choice of the borrower. The premium for CPI is paid annually and usually varies based on the size of the home loan.
Also, if lenders did not use LMI to mitigate lending losses, then those losses would need to be recouped from the profits of other mortgages, in effect increasing mortgage interest rates. To stay away from this, lending institutions opt to take out LMI and have the insurance provider take on the risk and wear any loss.
Please note, that even though LMI will give some benefits to the mortgagor, it doesn't cover the mortgagor against loss ensuing from foreclosure. LMI ONLY INSURES THE MORTGAGEE as in effect, they are the beneficiary of the insurance policy! In the event of a claim for loss, the lender will collect the proceeds from the LMI claim, not the mortgagor. Any loss ensuing from foreclosure, regardless of LMI, is a loss incurred by the borrower and will remain as such. The only difference being is that the mortgagor's legal responsibility to the finance provider for the loss will move as a legal responsibility to the LMI provider for the loss in the episode of an LMI claim by the lender.
Who pays the LMI Premium?
A mortgage where a deposit or equity of less than 20% is permitted means a higher risk to the lending institution, and in this case the lending institution will usually pass the cost of LMI on to the mortgagor as a fee for them being able to get a loan that they would normally not have been able to get.
What is the cost of Lenders Mortgage Insurance and how is it paid?
Are the providers of LMI sound?
How is Lender's Mortgage Insurance arranged?
Provided the borrower, homeloan structure, home refinancing purpose and security property meet with the appropriate LMI provider underwriting guidelines an LMI Certificate of Cover will be issued to the finance provider.
As you can understand, Lenders Mortgage Insurance does offer some benefit to the borrower in the form of lower interest rates however it is chiefly used as a risk mitigation tool by the lender. When refinancing a home the benefit of LMI is greatest when the security property equity is less than 20% as the mortgagor would generally not be able to obtain such a loan. However that increased benefit arrives at a price in the form of increased home refinancing expenses.
So when refinancing a home it is important to preserve as much security property equity as possible, in effect reducing the price tag and/or requirement for LMI and balance the worth being achieved from the home refinance with the price of LMI.
Source: Free Articles from ArticlesFactory.com
ABOUT THE AUTHOR
Kevin 'Kezz' Roby is a leading Australian Mortgage Planner well known for his Cost Saving Home Refinancing Strategies.
If you would like additional information in regards to Lenders Mortgage Insurance or Homeloans, please visit the website of the Home Refinancing Experts - refinancingcampbelltown.com.au