Mortgage Insurance: What it is and why you may need it
Mortgage insurance is a type of insurance that protects the lender in case you default on your mortgage payments.
You only need mortgage insurance when you are putting down less than 20% for your down payment. These types of loans are called High Ratios Mortgages. When you put down 20% or more for your down payment you are now in a Conventional mortgage. These are the current rules in Canada at this time.
The mortgage insurers all use the same premium schedule as listed below:
With 5% down payment you pay 3.15% of the mortgage balance
With 10% down payment you pay 2.40% of the mortgage balance
With 15% down payment you pay 1.80% of the mortgage balance
Some lenders will insure conventional mortgages as well. It allow them to sell the mortgage off later to investors or other lenders. Banks and lenders will do this occasionally so they can get more money to lender in the future.
When they insure a mortgage it is guaranteed the investor cannot lose their money. In some cases the lenders will pay the premium themselves on conventional mortgages so that they can sell these in the future.
In some cases, clients may have damaged credit scores or the home may be in an area outside a city or town. This is a higher risk for the lender in case of default. Some lenders will ask that the mortgage be insured to protect them once again. If this is the case the client is then asked to pay the premium. The premiums are less as per below:
With 80% down payment you will pay 1.25% on the mortgage balance
With 75% down payment you will pay .75% on the mortgage balance
With 60% or more down payment you will pay .60% on the mortgage balance.
It should be noted the premium they charge can be paid in one of two ways:
1) You can pay it up front thus avoiding adding it to the mortgage and paying interest on it for years to come.
2) You can have it added to the mortgage balance and you will pay interest on the new mortgage balance.
Just to be clear, you have to pay these premiums when you are putting down less than 20% and in some cases even when putting down more as explained above.
What happens if I stop making my mortgage payments?
This is what the insurance is designed for. If you should stop making your regular mortgage payments the lender will contact you within days of a missed payment to help arrange a schedule to get back on track.
If you continue to miss payments the lender will begin a foreclosure proceeding against you. They must file a document in the courts and this takes between 4 to 6 months to go through the courts.
If you cannot make up the payments missed or renegotiate with the lender for terms that will work for you. The courts will issue a foreclosure decree on your home.
You will be forced to move out of your home and the bank will then sell the house. If after the sale is all done and all expenses are paid in full and there is any money left they will give this to you.
At this point the lender can make a claim on the insurance policy and they will be paid back every cent that is left owning on the mortgage.
The insurance company may or may not come after you for any losses they have incurred as there are many costs in doing a foreclosure, legal fees, sale commissions, maintenance fees while in the banks possession etc. These add up fast and normally absorb any equity left in the house.
The lender and insurance company force you to pay the premium for the insurance policy. The policy only protects the lender in case you default and you get to pay for this policy.
The only way to avoid this is to pay a larger down payment. Even then, you may be asked to pay a premium due to where you are buying or due to your damaged credit history.
If your credit is damaged then head over to my other site and learn how to repair and rebuild your credit. You can also get some great tips on how to maintain and ensure your credit rating stays good.
There is a free book offer called Fix my credit NOW! You can get a copy at www.fixmycreditinfo.com
In Canada we have 3 companies that provide mortgage insurance they are:
1) CMHC or Canada Mortgage and Housing Corporation www.cmhc.ca
2) Genworth Financial www.genworth.com
3) Canada Guaranty www.canadaguaranty.ca
To find out more information on these mortgage insurers please visit their websites. They are loaded with great information and worksheets to help you budget for your new home purchase.
If you have questions you can also send me an e-mail at Daryl@maxmort.ca and I can try to help lead you in the right direction.