What is Lenders Mortgage Insurance?

Lenders mortgage insurance (LMI), which is also referred to as private mortgage insurance, is a type of coverage that benefits the lender of a mortgage. Lenders mortgage insurance prevents the lender from losing all of its investment if the borrower cannot repay his loan. In most cases, mortgage lenders require borrowers to pay for this type of insurance if they make down payments of less than 20 percent on their mortgages.

There are basically two types of lenders mortgage insurance: one is paid by the borrower and the other is paid by the lender. Both types, however, benefit the mortgage lender in a default situation. The first type is paid by the borrower and covers the lender if the borrower loses his job, is disabled, or cannot pay for another covered reason. While this type of insurance does not directly benefit the borrower, it may make it easier for him to obtain a mortgage loan. In most cases, lenders are more willing to offer loans with small down payments if the borrower obtains mortgage insurance.

The other type of lenders mortgage insurance is paid by the lender. This type covers the lender for the same type of situations that borrower-paid insurance does. Likewise, it covers the lender but does allow the borrower freedom from paying private mortgage insurance. In most cases, however, mortgage lenders are only willing to pay for mortgage insurance in certain situations. For example, a lender may pay for lenders mortgage insurance in exchange for charging a borrower a higher interest rate.

An individual does not always have to obtain lenders mortgage insurance to secure a mortgage loan. Whether or not a lender will request it usually depends on something called a loan-to-value ratio. A loan-to-value ratio compares the total amount of a mortgage loan with the appraised value of a property. For example, if a person buys a home with an appraised value of $100,000 US dollars (USD) and borrows $80,000 USD, his loan-to-value ratio would be 80 percent. If the loan-to-value ratio is more that 80 percent, most lenders will request lenders mortgage insurance.

Some people may try to avoid paying lenders insurance by getting an additional loan to cover a down payment of at least 20 percent on a mortgage. This type of arrangement does allow the borrower to avoid the insurance. In some cases, however, the cost of the second loan may be higher than that of lenders mortgage insurance.