Ok, your loan has been determined to be higher risk therefore you have to pay more. Why did we need to invent a second payment called PMI instead of just charging a higher rate to higher risk borrowers? Why do interest rates need to remain “reasonable” ?
In Australia, some 60 years ago, banks wouldn’t lend over 80% of the purchase price for a property.
The federal government created a government department to provide lenders mortgage insurance. It wasn’t a free government service, but a good example of the federal government stepping in to do something private enterprise wasn’t able to.
Since then of course that department has been privatised, like everything else, so private institutions provide that service now.
There do remain some differences between LMI and just simply extra interest. Notably LMI is a once off payment, and it can be included in the loan.
More recently, the Australian Federal Government has rolled out a scheme to pretty much abolish LMI. They’re just going to guarantee the loans for free.
The financial illiteracy of lemmy users always amazes me.
PMI is not double dipping.
It keeps the risk reasonable so that interest rates can remain reasonable.
With no PMI there’s extra risk that would need to be priced in to interest.
No one likes PMI, but it’s not evil.
Ok, your loan has been determined to be higher risk therefore you have to pay more. Why did we need to invent a second payment called PMI instead of just charging a higher rate to higher risk borrowers? Why do interest rates need to remain “reasonable” ?
That’s a good question actually.
In Australia, some 60 years ago, banks wouldn’t lend over 80% of the purchase price for a property.
The federal government created a government department to provide lenders mortgage insurance. It wasn’t a free government service, but a good example of the federal government stepping in to do something private enterprise wasn’t able to.
Since then of course that department has been privatised, like everything else, so private institutions provide that service now.
There do remain some differences between LMI and just simply extra interest. Notably LMI is a once off payment, and it can be included in the loan.
More recently, the Australian Federal Government has rolled out a scheme to pretty much abolish LMI. They’re just going to guarantee the loans for free.