What to Consider Before Buying Mortgage Insurance
According to the Australian Bureau of Statistics, if you want to secure a mortgage, on average, you’ll need a deposit of $106,743. Since it can take first-time homebuyers over a decade to save a 20% deposit, many opt for a smaller deposit and purchase mortgage insurance.
Having mortgage insurance explained can help you make an informed decision when buying mortgage insurance. So keep reading this mortgage insurance guide to know what you need to consider.
What Is Mortgage Insurance?
If you’ve ever bought an insurance product before, you’re probably used to it protecting you financially. Lenders mortgage insurance, or LMI, is a bit different in that it doesn’t protect you, the buyer. It also doesn’t protect your home or belongings.
Instead, it protects your mortgage lender. If you were to default on your mortgage and had only a small part of it paid off, your lender would be on the hook for a lot of money. Since lenders don’t like to take on a lot of risks, LMI helps decrease that risk.
Mortgage insurance can help you too. Without it and with a low down payment, it might be difficult to qualify for a mortgage. But since your lender sees you as less risky with insurance, they will be more likely to approve you for your loan.
Do You Need Mortgage Insurance?
Before you buy mortgage insurance, it’s important to determine if you actually need it. In some cases, it is required, while you can avoid it in others.
In general, if your down payment is less than 20% of the home’s purchase price, most lenders will require you to carry mortgage insurance. You can usually avoid mortgage insurance if you make a larger down payment.
Certain lenders make exceptions to their LMI policies. Some provide discounts and others waive LMI requirements if you have a certain profession. It’s always beneficial to ask if you meet any of these exceptions.
What Will the Premium Be?
Like other types of insurance, you’ll need to pay a premium. However, that premium can vary greatly between different lenders. In addition, your premium will be affected by the loan to value ratio of your mortgage.
You could shop around and ask each lender what the cost will be to try to find the best price. However, the easiest way is to use the LMI calculator and accompanying mortgage insurance tips. With this tool, you can compare the costs across different lenders so you can make a better decision.
What Are the Terms?
Different lenders also offer different terms when it comes to mortgage insurance. One of the biggest differences is what happens when your equity reaches 20% of your home’s value?
After this occurs, your lender has a much lower risk, so some lenders allow you to get rid of LMI at this point. However, others don’t allow this. You should check what your lender’s stance is as removing the LMI requirement can save you a lot of money.
Choose the Best Mortgage Insurance
If you’re planning on buying a house, you may need to purchase mortgage insurance. In this case, there are a few factors you should consider to make sure you are getting the best deal.
If this article was helpful to you, check out more of our finance posts.