Mortgage Insurance Explained

mortYou know that you need a down payment for a home when you’re applying for a mortgage. But did you know that a down payment less than 20% may mean you need to purchase Mortgage Insurance? Learn what Mortgage Insurance is, how it works, and who needs it.

Mortgage Insurance protects your lender if you default on your mortgage. Home buyers who are putting down less than 20 percent are required to purchase this insurance. Even if you already you own a home and you decide to refinance, you may need to pay for Mortgage Insurance if your established home equity is under 20 percent. You’ll pay a one-time premium for your Mortgage Insurance, which is expressed as a percentage ranging from 0.6 to 4.5 percent of your mortgage amount, depending on the size of your down payment. This premium can be paid upfront if you have the extra cash, to keep your monthly payments down, but is usually added to the borrowed amount which, of course,  increases your monthly premium. Mortgage Insurance offers no protection to you, the homeowner.   It is only intended to protect the lender from an owner who stops making payments. 

Home buyers who put down less than 20 percent of the home value must take out mortgage loan insurance for the difference between their down payment and 20 percent. Home buyers with less than perfect credit, or home buyers who are self employed, may be required by their lender to take out mortgage insurance even if they are putting down 20 percent!

Your mortgage lender will let you know during the mortgage application process if you are require Mortgage Insurance. You don’t need to apply for mortgage loan insurance yourself. If it’s needed, your lender will make the arrangements. The insurance premium varies by the size of a down payment. If a home buyer is placing 5 percent down—and borrowing 95 percent—they will pay 4 percent of the borrowed amount in mortgage loan insurance premiums. If they are putting 15 percent down—and borrowing 85 percent—the premium would be 2.8 percent. So, obviously, the more money you can put down, the better. Interested in more details, go to Canada Mortgage & Housing Corporation or Genworth Canada, the two sources of Mortgage Insurance in Canada, (or contact me for the whole “First Time Buyer” story.)