Everything You Need to Know About Mortgage Insurance

September 22, 2020

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As you get ready to buy your home, you’ll likely start to hear about various additional costs that you’ll have to pay as part of your mortgage, such as mortgage insurance.

Mortgage insurance is a type of insurance that some borrowers have to carry. It helps protect the interest of the lender in case you were to default on the mortgage, so they can recoup their losses.

We’ve put together this post to help you understand everything you need to know about mortgage insurance.

Do I Need Mortgage Insurance?

Your lender will tell you whether or not they require mortgage insurance. In most cases, you do not need to have mortgage insurance if your down payment is greater than 20 percent; if you have less than a 20 percent down payment, you’ll need to pay the mortgage insurance.

This should be an incentive for those who are close to that 20 percent mark. To avoid paying the mortgage insurance, you may want to wait a few more months to save up that extra money, borrow from your RRSP through the Home Buyers’ Plan if you’re eligible, or try to lower the cost of your home so that your down payment is a larger percentage.

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How Does Mortgage Insurance Work?

The cost of mortgage insurance is a certain percentage of the amount of money you need to borrow for your mortgage. This amount gets added to the mortgage you’re taking out, and then the total amount is amortized over the term of your mortgage. 

For instance, let’s say you were borrowing $300,000 for the cost of the home, and the rate for mortgage insurance was 2 percent. That would mean that the cost of the mortgage insurance was $6,000. You would add this to the $300,000, meaning that your total mortgage amount is $306,000.

How Is Mortgage Insurance Different from Homeowners’ Insurance?

New homebuyers sometimes confuse mortgage insurance and homeowners’ insurance. The mortgage insurance protects the bank in case you default on the loan. Homeowners’ insurance protects your home from damage. You need homeowners’ insurance whether or not you need mortgage insurance.

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Who Chooses the Mortgage Insurance Provider?

The lender is the one who benefits from the insurance if it’s needed, so the lender is the one who chooses the mortgage insurance provider. You can compare mortgage costs with different lenders, though. It’s possible that a different lender will choose an insurance provider at a lower cost.

When Do I Apply for Mortgage Insurance?

This is something that the lender will do while they are preparing the mortgage documents. It happens sometime between the date your offer on the home is formally accepted and the day that you sign the closing papers. Usually, there is nothing special that you need to do beyond providing the lender with anything needed for the mortgage application.

How Much Is Mortgage Insurance?

Mortgage insurance is usually somewhere between 1 and 4 percent of the total mortgage. It depends on how much money you’re putting down for your down payment. Those who have more than 15 percent but less than 20 percent will get the lowest rates for mortgage insurance. Those who have between 5 and 10 percent for their down payment will pay the highest rates.

Fortunately, this does not translate to a lot of extra money on a per-month basis. In most cases, it will be less than $100 a month. There are also several online mortgage calculators you can use to get a better idea of your specific rate. 

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Is There Anything Else to Know?

Yes. Everything we’ve been talking about so far assumes that you’re applying for a mortgage with a standard type of income, such as a salary or a per-hour rate, and it assumes that the lender will approve your mortgage application, which typically requires you to have had a steady income for the past several years. Naturally, those who are self-employed represent a higher risk to the lender. If you are applying for a mortgage with non-traditional income, the lender may require you to pay a higher rate for the mortgage insurance. 

The best thing to do is to sit down with your mortgage lender to find out what you’ll be paying for your particular situation. Since everyone has details that vary, it’s hard to offer generalized advice in such a short post.

Many homebuyers need to have mortgage insurance to get into the home of their dreams, so it’s something that you should plan for. You can avoid it by having more than 20 percent for your down payment, but you shouldn’t let having to pay for mortgage insurance hold you back from making your purchase. If all of your other finances are in order, and you’re ready to buy your home, mortgage insurance is a small price to pay.

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