Why mortgage insurance exists
Mortgage insurance protects the lender if you default with a small deposit. It does not replace home insurance on the building. Borrowers pay premiums so lenders can offer higher LVR loans.
In the US, private mortgage insurance (PMI) often applies when down payment is below 20 percent on conventional loans. In Australia and New Zealand, lender mortgage insurance (LMI) plays a similar role for low deposit borrowers.
How premiums are charged
Some lenders add a one-off LMI premium at settlement. Others charge monthly PMI until equity reaches a threshold. The cost depends on loan size, LVR, and sometimes credit score.
Premiums are not refundable in every case if you refinance early. Ask for a clear premium quote before you increase your loan amount or roll insurance into the balance.
Removing or avoiding insurance
Saving a larger deposit is the simplest way to avoid insurance. Guarantor loans or family equity schemes may help in some markets without traditional LMI.
On many US conventional loans, PMI can drop off once LTV reaches 78 percent through scheduled payments or after an appraisal shows 20 percent equity. Rules differ for FHA and other programs, so read your loan type.
Insurance vs other fees
Do not confuse mortgage insurance with title insurance, home insurance, or loan protection policies. Each covers different risks. Your closing disclosure or loan contract lists what you are buying.
When comparing low deposit options, add insurance cost to the true cost of borrowing. A slightly higher rate without capitalized insurance may be clearer over the loan life.
FAQs
Does PMI protect me if I lose my job?
No. PMI protects the lender on low down payment loans. Job loss coverage would be a separate insurance product if you choose to buy it.
Can I pay LMI upfront?
Many lenders let you pay LMI as a one-time fee at settlement or capitalize it into the loan. Compare total cost and how capitalizing affects your LVR and repayments.
Is mortgage insurance tax deductible?
Tax treatment depends on your country and current law. Consult a tax professional for rules that apply to you. This article is general information only.
General information only. Not financial, tax, insurance or credit advice.