How to Avoid Paying for Lenders Mortgage Insurance Twice

November 29, 2016

Understanding Your Mortgage in 2017

Lenders make it possible for some buyers to secure a home loan with less than the standard 20% down payment. To cover this shortage, a lender will add an upfront or monthly charge to ensure that their potential losses are insured, just in case the borrower defaults on their payments. This insurance is called Lender’s Mortgage Insurance.

LMI is basically a good thing, and many people now own their home using this method. It can take a long time for some people to be able to save 20% of the cost of a home, and this enables them to skip this step. People that are self-employed will be required to get LMI if they are going to borrow as much as 60% or more of the home’s Loan-to-Value Ratio (LVR).

Another factor that makes it difficult to save is rising property values. Since property prices tend to increase over time, by the time a potential buyer has saved the 20% needed to secure a home loan, the value of the home has risen by another 20% or more.

How do you pay for LMI?

There are two different ways to pay LMI when getting a home loan. You can pay for it up front, which is often the case, or you may get it capitalised as part of the loan. This means that you will be paying a portion of it for the life of the mortgage.

When you refinance, however, it often means that you are going to pay for LMI twice on the same amount. This cost greatly reduces your reason for refinancing in the first place. However if you now have more than the required 20% of the LVR either in savings, or when combined with equity, then you can avoid paying LMI twice.

What is the cost of LMI?

Although LMI may be necessary to get a home loan, you need to understand how much money it really involves. Once you understand the amounts involved, you will see why it is important to consider. If you obtain a loan for 90% of the LVR with a house that costs about $800,000, it is likely that you will pay over $19,000 in LMI. With interest rates being what they are now, this means that it is worth about six months of repayments on a mortgage of this size.

Am I eligible for a partial refund on LMI?

If you look at your mortgage document or talk to your lender, you may find that you could be entitled to a partial refund of your LMI costs when you refinance. Not all lenders will do this, and even if they do, it is unlikely that most of them will refund anything after the second year of the mortgage.

With a refund, you will most likely find that a lender may give back as much as 40% of the cost of LMI in the first year. If it is in the second year, you may be able to get back between 20 to 30% of the cost. If you have refinanced recently, check with your lender about this to learn if you qualify.

How to avoid paying for LMI twice

There are several things you can do to avoid paying for LMI more than once if you refinance. The simplest way is to save up to 20% before refinancing your home. You also could wait until you are sure you have paid more on your mortgage than the 20% LVR. A third way might be to get a partner or parent to become a guarantor or to share the cost or add their equity to your own, letting you avoid paying LMI altogether.

You can save a considerable amount of money if you can refinance without having to pay for LMI twice. It will be worth it to you to try and get a partial refund if you refinanced within the first two years, or to find a way to avoid paying it at all on your new home loan.

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