Home buyers who make a down payment of less than 20 percent are usually obligated to pay insurance for the mortgage itself. With this information, borrowers can understand how lenders mortgage insurance works, and what they can expect to pay for a home in East Calgary or elsewhere.
How Does Mortgage Insurance Differ from Home Insurance?
Mortgage insurance is typically called "Lenders Mortgage Insurance" simply because it is designed to protect the lender in the event that the borrower defaults on the mortgage. Home insurance exists to protect the homeowner and the items inside the home. Mortgage insurance is typically obtained by the lender, and the lender has the option to pass on that cost to the borrower. Many lenders expect home buyers to pay their own mortgage insurance costs.
Why Is Mortgage Insurance Typically Required?
Not everyone is expected to pay for mortgage insurance, but there are a few factors that may affect a lenders decision to purchase it. People who put a down payment of less than 20 percent on a home purchase are required by law to have mortgage insurance on the loan, to conform to lending requirements. In addition, lenders may decide to put mortgage insurance on certain types of loans. Borrowers with a limited credit history, or who are buying in an area with a higher cost of housing, may be required to pay for mortgage insurance even if they put at least 20 percent down. Loans of more than $1 million cannot receive mortgage insurance, which means that borrowers who seek a loan greater than this amount may need to put enough down to avoid mortgage insurance premiums.
How Much Is Mortgage Insurance?
The amount of the mortgage insurance premiums depends on the size of the down payment. It can range from less than 1 percent of the home value, to as much as 4.5 percent of the sale price. Lenders may choose to give borrowers the option of paying the mortgage insurance premiums in a lump sum at closing, or to wrap it into their monthly mortgage payment. People who consider paying premiums monthly should keep in mind that they may have to pay interest on the cost of the premiums, if they do not pay for it up front.
Are There Benefits to Paying Mortgage Insurance?
Although lenders mortgage insurance protects the lender from the borrower's possible mistakes, there are benefits to borrowers as well. Mortgage insurance makes it safer for lenders to offer mortgages to borrowers who may not be able to make a 20 percent down payment. In fact, mortgage insurance could mean that lenders can present mortgages with better terms to borrowers who might not otherwise be able to qualify for a mortgage at all.
Is Lenders Mortgage Insurance Right For You?
Lenders mortgage insurance, also known as lenders mortgage insurance, allows more people to buy homes, yet it does come with a cost to homebuyers. Weigh the pros and cons of getting PMI/LMI to decide what's best for you.
Pros of Lenders Mortgage Insurance
Lenders mortgage insurance allows people who would otherwise not have been able to buy a home to qualify for a mortgage and become a home owner. This simple fact alone can be invaluable for those who dream of home ownership and would otherwise be unable to get mortgage approval.
Home ownership in Canada also comes with tax benefits that can be advantageous. For instance, first-time homebuyers are eligible for a $750 tax credit. There's another tax rebate for new construction homes with a purchase price of less than $450,000. These benefits can offset the drawbacks of taking out lenders mortgage insurance to finance a home purchase.
PMI helps people who are in a hurry—such as expecting parents or someone who had to relocate for work and needs to quickly sort out their living situation —move ahead with a home purchase even if they haven't saved 20 percent. If waiting and saving more money isn't an option, PMI provides an expedient path to home ownership.
Those who can afford to put down 20 percent may prefer to put less money down and remain more liquid. For example, consider an entrepreneur who wants to have ready access to capital to fund their business. While the entrepreneur might be able to pay $50,000 toward a down payment, that money could be better utilized to grow their business. By putting less of their own money down and taking out PMI, individuals can choose how they want to use their savings on their South Calgary home.
Cons of Lenders Mortgage Insurance
Homebuyers must take out PMI if they are putting less than 20 percent down, but the amount of PMI varies by the percentage of the down payment. Thus, a homebuyer who puts 10 percent down needs less PMI than someone who puts down 5 percent. Homebuyers can figure out how much PMI they would be subject to for a fuller understanding of what's at stake.
PMI is known as Lenders Mortgage Insurance because it protects the lender, not the homeowner. Homeowners pay extra for the PMI and receive no benefits from it. For this reason, people who can afford to rent while they save up extra money may prefer to continue renting until they've saved 20 percent for a down payment. Another option is rent-to-own, which allows renters the option to save up extra money for a down payment while renting the home they wish to buy.
Over the lifetime of the loan, PMI is expensive. It represents an added cost (often several hundred dollars per month) that must be paid. PMI can be discharge when homeowners have built up 20 percent equity, meaning that they own 20 percent of the home. Those who pay 20 percent down achieve this upon closing, so they never need PMI. It can take years to build this much equity, and some people may not be willing or able to pay extra for PMI while they build home equity.
When Can People Eliminate Mortgage Insurance?
As a general rule, people may be able to eliminate their lenders mortgage insurance premiums once they have reached 20 percent equity in the home. This is not always the case, so borrowers should research the terms listed in their mortgage paperwork. Loans requiring mortgage insurance may only be amortized for 25 years or less. As such, people who are looking to renegotiate their loans may be able to get rid of the premiums at the same time, if they have accrued enough equity in the property.
Mortgage insurance protects lenders, so that they can allow borrowers to make a lower down payment. With these tips, buyers are better prepared to understand this aspect of their mortgage costs.