What Is Mortgage Insurance?
Mortgage insurance offers the possibility of borrowing a larger amount on the price of the home you wish to purchase, with a lower deposit than would usually be required sans insurance. This type of insurance protects your lender in the event that you default on your payments. It can be a significant expense that many people would rather not incur when purchasing a home, but the security that mortgage insurance provides makes lenders open to lending in situations with supposedly more risky. Therefore, purchasing mortgage insurance may be required when your loan poses a greater risk to the lender – customarily, if you are borrowing more than 80% of the property value, insurance is necessary. In these instances where purchasing lender mortgage insurance is a requirement, you should understand a little more about it and what you should expect regarding costs and commitment.
How Much Does Mortgage Insurance Cost?
Depending on the country you are in, lender mortgage insurance can be a onetime cost, or it can be yearly cost. For example, In the U.S., homeowners are expected to make separate payments for mortgage insurance in addition to the initial premium, while Australians just pay a onetime premium payment. Therefore, you must evaluate your own situation and determine what payments might look like for your own budget. You can find multiple online resources that will allow you to compare rates and predict expected premiums depending on mortgage amounts, using home loan calculator tools. You will also want to look at your home loan options with amortgage broker to get the most suitable outcome. A mortgage is a long-term commitment so reviewing your options is important to make sure you are doing everything you can to make the buying experience positive, while keeping costs as low as possible.
When lender mortgage insurance is a onetime expense, it is important to know that your mortgage insurance will not affect your monthly mortgage payments. You pay your premium, usually about 2% of the loan amount, when your loan is advanced. Your lender will handle the paperwork.
One of the most important things to remember when thinking about the cost of mortgage insurance is that you can shop around for the best rates, just like everything else. There are ways to minimize the cost of insurance, so make sure you take your time to find out all of the info you can. Compare lenders and insurers, insurance rates and premiums. Take all of these factors into consideration before deciding. You should also think about the amount you have saved to put towards a down payment. You will pay a higher LMI premium if you do not have a larger lump sum saved and therefore need to take out a larger home loan. But sometimes this can be worth it. Mortgage loans, and subsequently mortgage insurance, make it possible for home buyers to buy and move into new homes much more quickly than the years it would take to save up a down payment.
How Do Banks Calculate Premiums?
Banks calculate your premium by charging a percentage of your loan and the property value. This means that your premium depends on the loan amount, so if you are borrowing a larger amount, for example, 95% of the property value, your premium will be higher. It is traditional in many instances for a lender to charge 2% of the loan amount, meaning that a $2000 premium would accompany a $200,000 loan. But because your premium is dependent on not only the amount of the loan, but on the percentage of the property value that you are borrowing, it is difficult to predict premium amounts unless you know more specifics regarding the amount your budget requires you to borrow.
Make sure to compare rates and premiums from a variety of lenders. Some will be more competitive than others and it will definitely be in your best interests to consider all of your options. Now that you know some of the considerations you need to make, start thinking about your mortgage insurance options.
Buying a home is exciting, but there are many components to making such a big purchase and each one deserves your careful evaluation. Mortgage insurance is just one of these many components that you should spend time putting some thought into. Mortgage insurance means that prospective home buyers who do not have considerable savings for down payments can still participate and take advantage of a favorable buying market.
About the author : Theresa Stanton is a freelance writer, editor, and researcher who spends time writing and researching on a variety of financial topics. As an experienced financial writer, she is interested in helping readers to better understand issues relating to daily finance, and researching home loans and mortgage broker options for home buyers.