There’s a need to know about mortgage insurance because it will cost you money. When you buy a house using conventional loans, mortgage insurance is one thing you will have to figure out how to pay for if you have a small or no down payment. When people consider buying a home, they often ask if mortgage insurance is good. Since there is a lot of confusion around this topic, we’ve decided to clarify it here. We’ll answer your most pressing questions and give you an overview of how mortgage insurance works so that you can make an informed decision. You will also get to know how to avoid paying for mortgage insurance altogether.
1. Mortgage Insurance Protects The Lender, Not You, In Case Of Default
A lender will typically require you to purchase mortgage insurance if your down payment is less than 20 percent of your home’s purchase price. It protects them if you default on your loan, which happens only about 2 percent of the time for conventional loans.
In other words, it’s unlikely you’ll ever need to claim your policy. However, it does come with a monthly premium. If you need an affordable mortgage that meets your needs, you can contact the best mortgage broker and get started immediately!
2. The Cost Of PMI May Vary Based On Your Credit Score And Other Factors
If you put less than 20% down when you buy a home, lenders will require that you purchase mortgage insurance. Depending on your lender and other factors, it can be costly—even 1-2% of your loan’s value per year. Try to make a larger down payment to avoid paying PMI.
However, you can choose alternative mortgage lenders who may offer more affordable rates for borrowers with lower credit scores or higher debt-to-income ratios. You can otherwise use your mortgage insurance premiums as an opportunity to build equity faster by making additional payments toward your principal balance each month.
3. Mortgage Insurance Is Different From Homeowners Insurance
It is vital to understand what mortgage insurance is and how it works clearly. While homeowners insurance protects your home and its contents in case of a fire, windstorm, or other disasters, mortgage insurance protects your lender if you default on your loan. If you don’t make payments for three months, most lenders will require that you purchase mortgage insurance before they give you another loan.
In case of default, your lender will foreclose on your house and sell it at auction, using any proceeds from selling your home to pay off any remaining balance of your loan. The amount of money that needs to bridge the gap between how much you owe and how much they get from selling your home is a deficiency—and mortgage insurance covers that amount. To avoid such double losses, you can contact private mortgage lenders in BC, Canada, to discuss your options.
4. Private Mortgage Insurance Adds 0.2 To 1 Percent Monthly On Top Of Premiums
One common misconception about mortgage insurance is that it’s a one-time fee. If you put less than 20 percent down on your home purchase, most lenders will require private mortgage insurance (PMI) throughout your entire loan term. PMI can add up to 0.2 percent of your loan amount each month in addition to standard property taxes and homeowners’ insurance fees.
Hence, for every $100,000 borrowed, you could be paying an extra $200 per year in mortgage insurance alone. And while some lenders allow you to cancel PMI once your equity reaches 20 percent or higher, others do not—meaning you could pay hundreds of dollars more over time simply because you didn’t have enough money saved up at closing.
5. You Can Avoid Paying For Private Mortgage Interest
If you’re a first-time homebuyer and can make a 20% down payment, you’ll avoid paying for private mortgage insurance in Canada. However, if you put less than 20% down on your home purchase, there’s a good chance that you’ll need to pay an annual fee of 1.0%-1.5% of your loan balance, the private mortgage insurance. It protects lenders from having to shoulder 100% of borrower risk. Another option for avoiding mortgage insurance is working with a private lender who doesn’t require PMI.
Conclusion
If you’re not sure about how to make your monthly mortgage payments, an essential part of your home financing should be considering whether or not you need a mortgage insurance policy. Your lender will offer one, and although it may seem like a brilliant idea at first glance, it could potentially increase your overall cost of homeownership—and that’s something you want to avoid.
By understanding what mortgage insurance is, how it works, and how much it costs, you can determine if a policy is suitable for your needs. In many cases, especially if your down payment is less than 20 percent of your home value, it’s crucial to contact a reliable mortgage broker to help you understand all of your options before deciding on a loan type. After all, there’s no room for error when securing your financial future.
