For most people, owning a house is a life-long dream. However, not all home buyers can come up with a large sum of money for a house deposit. If you wish to buy a house in Canada but cannot afford the traditional down payment, we have some good news for you. With mortgage insurance, you can purchase your dream home without paying a higher interest rate than other buyers.
In this article, we’ll look at what mortgage insurance means, how it works, and other things you should know as a prospective homeowner.
What is mortgage insurance?
Mortgage insurance (MI) is a kind of insurance policy that protects lenders against loss if the borrower defaults on payments or passes away with outstanding debt.
Lenders normally require at least a 20 percent down payment before giving out home loans. But if you cannot pay the upfront costs, you will need to get mortgage insurance. This insurance is a safety blanket for the lenders in case you fail to keep your side of the bargain.
You will also need to have mortgage insurance if you are purchasing a home of more than 1 million dollars.
How does mortgage insurance work?
While you (the borrower) pay the cost of mortgage insurance, it covers the lender who is providing the funds for the home purchase. If you default on your payments, the insurance provider will take necessary legal actions and enforce payments.
The insurer will also compensate the lenders if there is any shortfall after selling off your property. Note that the lenders or mortgage insurers may still ask you to pay the difference if they sold your property and the sale price doesn’t cover the loan.
How much does mortgage insurance cost?
Mortgage insurance can be expensive for homebuyers. The premium can range from a few thousand dollars to tens of thousands of dollars depending on many factors, including:
- The loan amount
- Your loan-to-value ratio (LVR)
- Your occupation or industry
- The state the property is located
- If you are a first-time home buyer
- Whether you are buying the house to live in it or rent it out
How is mortgage insurance paid?
The cost of mortgage default insurance is included in the monthly payments you make to your lender. Unlike land transfer taxes, you don’t need to find a large sum of money to pay this fee once and for all. Your lender will add the insurance to your mortgage, and you can pay it over the period of your loan.
How to calculate mortgage insurance
If you are applying for a home loan with a small down payment, it’s important to determine how much your mortgage insurance would cost so you be more financially prepared for it.
Knowing the extra expense on top of your mortgage will also help you plan how you will pay for it. Our mortgage insurance calculator can determine the amount you will have to pay to your lender over a long period of time.
To calculate your mortgage insurance, you will need the following information: the total home value, the down payment amount, the insurance premium, as well as the amortization period.
- Step 1:- determine your down payment as a percentage of the home’s purchase price (down payment/home value)
- Step II: Calculate your loan amount (home price -down payment)
- Step III: Calculate the premium on your mortgage insurance (loan amount x insurance premium)
Let’s say you are a first-time buyer who is planning to purchase a $600,000 home with a down payment of 10 % percent; your mortgage will be $540,000. Assuming your mortgage insurance rate is 3.10 %, the insurance premium is going to be $540,000 x 3.10 % = $16,740.
Can you eliminate or avoid mortgage insurance?
One sure way to avoid paying insurance on your mortgage is to deposit 20 % of the home purchase price. If you cannot meet this requirement, mortgage insurance is automatically added to your total monthly payments. You may also be able to avoid paying insurance premiums if you refinance your mortgage and keep at least 20 % in the house.
Another way you may save money on mortgage insurance is by asking for a shorter amortization period for your home loan. The insurance premium is usually higher for mortgages with a longer pay-off time.
It is also possible to reduce or avoid mortgage insurance premiums altogether if you choose to move to a different property, thanks to the “portability feature.” However, you need to consult with your lender to know the terms and conditions that should be met before porting your mortgage.