Don't you just love acronyms? The funny thing about an abbreviation is that even when you are given the full wording, you usually still have no idea what the name or phrase means. Take LMI – it stands for Lender Mortgage Insurance – ah ha right? Well if you are like most home buyers, you haven't the faintest idea what LMI/Lender Mortgage Insurance is, why you have to pay it and of course when it ends.

Lender Mortgage Insurance is, for lack of a better term, an insurance default protection plan for your home loan financing company that you pay for.

When you purchase a residence, the standard or "required" down payment amount is the equivalent of 20% of the purchase price. In other words, if you are buying a home for $100,000.00, your mortgage company or lien holder expects you to put $20,000.00 down plus your closing costs. That's what a lender likes to see as a good faith on your part.

However, in today's real estate market of skyrocketing housing prices and that ever looming "market bubble", it is very difficult if not all together impossible for prospective home buyers (especially first time purchasers) to have that elusive 20% down. If you qualify and can afford the monthly payments of a more expensive home – say $200,000.00 and up – having $40,000.00 or more for a down payment is actually quite an achievement.

So what do you do if you cannot manage that amount of money? If you cannot place 20% of the purchase price down on, the mortgage company will ask you to pay for their Lender Mortgage Insurance which is a policy designed to pay off your mortgage should you default on your loan and the house sells for less than 80% of the value. This practice came into existence in the early 1990's as a way to help people purchase a home without the huge down payment and ease the possibility of loss by default to the lender.

Sounds confusing – right? It isn't meant to be, but it somehow does seem strange for the home purchaser to have to pay for a mortgage company's investment default protection insurance.

Well let's consider this for a moment –

Why are you, the home buyer, paying for the Lender's Insurance? Because the Lender wants 20% down and if you are unable to come up with that amount, they want assurance from you that should you default, they will not lose any money. It is similar to an automobile lender requiring you to have full coverage insurance on your financed car or a credit card company wanting you to purchase credit repayment coverage. But remember, LMI is insurance coverage if you default on the mortgage and the property sells for less than 80% of the value – only – nothing else.

If you qualify for the loan amount, why do you have to purchase LMI? Due to the fact that the debt load being carried by the mortgage company is greatly increased when a smaller down payment is placed by the home buyer, the Lender wants to protect their investment and trust in you. By having you pay for LMI coverage, you are effectively reassuring the lender of your intention and willingness to repay the home loan.

Is there any way around LMI without having 20% down? Yes, you can take a second mortgage for the difference. Let's go back to the home being purchased for $100,000.00. If you are putting 5% down ($5,000.00), you can apply for a second mortgage for the remaining amount of $15,000.00. However, qualification for a second mortgage is more difficult; the lender must factor in your ability to make both the first and second mortgage payments without defaulting on either one.

Unfortunately, unlike other insurance coverage's, you do not get to "shop around" for the best deal. Lender Mortgage Insurance is a set figure based upon the amount of the loan, the amount of down you are lacking and a specific timeframe to pay on it. There are no discount companies, no cheaper rates – the fee amount is set based upon fixed parameters.

But, here is a money saving tip for you, when you reach that 80% mark in remaining principle on your mortgage, call you lender and get them to remove the LMI! No, it doesn't go away on its own, you have to remind your lender to remove it when you have paid your principle down below 80% of the loan amount. In most all case, the lender will end the LMI payments. If you opted and qualified for a second mortgage, your payments will have a definitive end.

That doesn't seem right – why should you have to remind the lender to remove the LMI? No – it isn't a scam, just like you have to call and change your insurance coverage on your car once you pay off the note, you have to do the same with LMI. Your auto insurance doesn't change your coverage without your permission or request and neither will your lender change your LMI coverage without your request to remove it once your principle balance is below the 80% loan value figure.

So what should your best course of action be, easy – talk to a mortgage broker about LMI and your options when buying your home. Your Broker will explain every aspect of Lender Mortgage Insurance and give you several choices to consider when seeking your loan. That is one of the reasons why you decided to go with a mortgage broker to help you purchase a new home.

Remember, finding your next home is really the easy and fun part, leave the difficult part (purchasing it) to you mortgage broker – their job is to make your home buying experience as pleasant as possible.