So you finally found your dream home? Congratulations! Have you thought of mortgage insurance? You’re in luck, because we’re breaking down what you need to know about mortgage insurance so you can move into the perfect house with peace of mind.
Mortgage Insurance Explained
Mortgage insurance protects the bank or the lienholder on a property in the event the borrower defaults on the loan. If your down payment is less than 20%, it’s mandatory to have mortgage insurance. Mortgage insurance costs homebuyers 2.80% to 4.00% of the total amount of their mortgage. The closer your down payment is to 20%, the lower your mortgage insurance premium will be.
How Mortgage Insurance Works
There are three primary providers of mortgage insurance in Canada: Canada Mortgage and Housing Corporation (CMHC), Genworth Canada, and Canada Guaranty. If you need to take out mortgage insurance, the cost of the premium is added to your monthly payment. Unlike closing costs, such as legal fees or land transfer tax, you are not required to pay a lump sum at the time of purchase. Instead, your mortgage default insurance premium is paid off monthly over the life of your loan, which is a maximum amortization of 25 years.
Different Types of Mortgage Insurance
Mortgage insurance protects the bank—not you. If you’re looking to protect your home, you need home insurance. In fact, it’s mandatory to have home insurance in place by your closing date to get your mortgage approved. But even if you have home insurance and your down payment is less than 20%, you will also need mortgage insurance. Lastly, you can opt for mortgage life insurance. Mortgage life insurance pays your mortgage in full (usually up to a limit) if you pass away. Mortgage life insurance premiums stay the same over the life of your mortgage, which makes it more affordable than other life insurance policies.
Mortgage Insurance Pros and Cons
Although the downside to mortgage insurance is that it can add thousands in interest over the life of your mortgage, the main pro to mortgage insurance is that it makes buying real estate more widely available to borrowers who might not otherwise qualify. Another advantage is that your premium doesn’t have to be paid before your closing date, which makes that extra cost more affordable.
So even though saving for a 20% down payment can be difficult due to the rising price of homes and unforeseen expenses, mortgage insurance can help unlock the door to your dream home faster. And now that you know what mortgage insurance is, you will better understand what coverage is appropriate for your specific needs. For more tips on homeownership, don’t forget to visit our blog.