What You Need to Know About LMI
What You Need to Know About LMI
Lenders Mortgage Insurance (LMI) is a specific type of insurance policy provided to lenders to protect them. It's offered just in case the lender defaults on their payments. Learn more about when it's required, why lenders insist on it, and how homeowners can release their responsibility from its payments.
The Basics of LMI
LMI is not paid to the insurance company directly by the homeowner. Instead, a homeowner will pay the lender the cost of the policy, and the lender will turn around and pay the insurance company to keep the policy going. As a general rule, all homeowners who are unable to produce a 20% down payment on their home are required to pay LMI until they do meet the 20% equity rule. It may seem like an arbitrary number, but homeowners who own at least a fifth of their property are deemed less likely to default on their payments than those who don't.
How Much It Costs
Canadian buyers tend to pay an average of 2.8 – 4 percent of the total cost of the loan. So if homeowners are able to put down $20,000 on a $150,000 loan, then they're paying between 2.8 and 4 percent of $130,000. Owners may be able to pay the premium of the insurance policy in a lump sum or spread it out by merging the payments with their monthly mortgage payments. LMI is not available on homes that cost $1 million or more or for mortgages that last longer than 25 years. Buyers are required to put down 20 percent for these homes.
How It Affects You
LMI doesn't affect a homeowner's financial standing or their credit rating. It's only there to cover incidental costs in case the lender has to sell the home after foreclosure. When a home is abandoned, the lender has to take care of reselling the property. From depreciation to real estate agent fees to repairs on the home, LMI is there to lessen the financial burden the lender has to face. Home buyers are highly encouraged to put down as much as possible on their home so they can meet the 20 percent requirement and cancel their LMI entirely.
The Perks of LMI
LMI exists to keep interest rates low. Instead of spreading the risk of default out for everyone, it only penalizes those who can't come up with a 20 percent down payment. It's also sometimes the only option for buyers to fulfill their dream of homeownership. Those who have the opportunity to buy a good property in a nice area may not have the time to wait for another chance. Buyers also have the option to research different lenders in their area to find the one that offers the best terms. A real estate agent can help recommend the right financial professionals to work with to ensure a buyer gets the best rates.
It's not unusual for home buyers to fail to come up with a 20% down payment, which means that LMI is a common occurrence for new Eagle Ridge homeowners. That's why it's so important for owners to put as much as they can toward their mortgage premium, so they can both reduce the total interest they pay and eliminate the LMI at the same time. The more homeowners understand the process, the more options they'll have as they settle the final details of their home loan.