Purchasing a home is a detailed process involving multiple parties. Everyone is looking to protect their own interest, and there are multiple regulations in place to protect those involved. As one gets involved in the process, they will likely be exposed to real estate terminology like escrow, contingencies and title insurance. Borrowers will likely have to learn about loan to value and loan to income ratios, prepayment penalties and points.
One aspect of acquiring a home mortgage that can affect your payments for years is lender's mortgage insurance. What is lender's mortgage insurance, who does it protect, is it necessary and can borrowers impact what it costs? Here's a quick guide to lender's mortgage insurance.
What is Lender's Mortgage Insurance
Lender's Mortgage Insurance (LMI) is sometimes referred to as Private Mortgage Insurance (PMI). It is a vehicle lenders use to better protect themselves from a loss in the event a borrower defaults on their loan. Mortgage lenders will require borrowers to take out lender's mortgage insurance if their down payment is not 20% or if the loan to value ratio is higher than 80%. The LMI better assures the lender they will be able to recover the full loan amount loan in case the borrower would default.
Who Does LMI Protect?
LMI protects the lender, although the borrower is usually responsible for paying for the premium of the lender's mortgage insurance. For example, on a $200,000 house, a 20% down payment would amount to $40,000. That is a significant amount of money to put aside. A lender may accept less than 20% down with the stipulation that the borrower takes out LMI. For borrowers who are struggling to accumulate a full 20% down payment, buying LMI may be an alternative.
How Borrowers Can Impact LMI Costs
The most obvious way for borrowers to avoid LMI costs is to have a 20% or larger down payment. Assuming that is not possible there are other steps that can be taken.
Increasing the amount of your down payment, for example, will lower PMI cost. Borrowers may consider the purchase of a less expensive home where the down payment they have will lower or eliminate LMI requirements.
Borrowers may also have access to a piggy-back mortgage or what is known as an 80/10/10 arrangement. In the purchase of a $200,000 home, for example, if a borrower only has a 10% down payment, he can seek out a loan for 80% of the property value ($160,000) and then “piggybacks” that loan with another 10% loan for $20,000. That $20,000 is put down with his original 10% down payment to complete the 20% requirement to eliminate PMI.
Getting Rid of LMI
Those who are required to secure LMI should know that it doesn't haven't to be a part of their permanent payments. LMI will normally be required until the equity reaches 20%. This can serve as an incentive for Langford home buyers, at least in the initial stages of a mortgage, to pay down the loan as quickly as possible. Check PMI agreements carefully, however, as some lenders require LMI payments for a certain period of time regardless of equity that is built in over time.
LMI, to some degree, can be a double-edged sword for borrowers. On one hand, it can help facilitate homeownership sooner for those struggling to save a 20% down payment. On the other hand, it can add significantly to the longer term costs of homeownership. It is another tool in the real estate toolbox that can help serve the needs of both borrowers and lenders.
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The Neal Estate Team is your #1 source for all of your Victoria BC real estate needs. Get in touch with us online or by phone at (250) 386-8181 to speak with a Victoria real estate buying or selling expert today. With decades of experience as a top selling Victoria REALTOR® and ranked in top 1% globally with over 4,000 transactions and $1 Billion SOLD, Ron Neal & The Neal Estate Team have the industry experience and market knowledge to help you make smart and informed buying or selling decisions.