Advantages of LMI

2010 April 21

Everyone needs insurance, as everyone needs to be protected from risk.  After the sub prime mortgage crisis hit the United States, it became even more apparent that even the giant companies can succumb to financial problems from poor decision making.

Due to these facts, it is understandable that banks and lenders likewise want to be protected from possible financial miscalculations.  Hence, the presence of LMI or Lenders Mortgage Insurance.  LMI was created for these banks and lenders.  With LMI they are protected from too much risk, especially for loans with 80% LVR or more.  When loans are more than 80% then LMI becomes mandatory.  What LMI does is when the borrower is unable to make the repayments, and defaults until the onset of foreclosure of mortgage.  If after the foreclosure, the amount cannot cover the entire amount of the loan, then the insurance companies come in to cover the losses.  Hence, the banks end up with zero loss.

Although the scenario may seem to benefit only the lender bank, it can also benefit possible borrowers in a positive way.  It helps by allowing the borrower to get into the real estate market much earlier.  This is done by not needing to provide the usual deposit of 20% before their loan can be granted.  It is no joke saving 20% for a deposit, and it can literally take forever to do.  Without LMI no deposit home loans would not be possible, as you would always be required to post a deposit.  Those who do not know how to save will never be able to get a loan if the setup was like this.

LMI is a complicated topic and guidance should be taken from the home loan experts.  With the help of the experts, they can assist you in deciding whether it would be practical to get LMI, or to just save up for a deposit.  There are endless possibilities in home loans, and with the aid of the home loan experts.  These possibilities can be shown to you in full detail so you should be comfortable with the fact that you left no stone unturned.

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