When it comes to buying a home, there are many expenses that you need to consider, including the down payment, mortgage, and various other fees. For those who are unable to put down a large enough down payment, mortgage loan insurance is a popular solution. Here, we’ll explore what mortgage loan insurance is and how it works.
What is Mortgage Loan Insurance?
Mortgage loan insurance is a product that is offered by the Canadian Mortgage and Housing Corporation (CMHC), which is a government-run corporation. This type of insurance is designed to help those who cannot afford to put down a large down payment when buying a home.
If you want to buy a home with a down payment of less than 20%, you’ll need mortgage loan insurance. This protects your lender in case you can’t make your payments. Essentially, it is insurance that is designed to protect the lender, not the borrower.
Benefits of Mortgage Loan Insurance
There are many benefits to mortgage loan insurance. For one, it allows you to get a mortgage for up to 95% of the purchase price of a home. This means that you can get into a home with a smaller down payment than you might otherwise need.
Another benefit is that it ensures you get a reasonable interest rate, even with your smaller down payment. This is because mortgage loan insurance helps stabilize the housing market. During economic slumps when down payments may be harder to save, it ensures the availability of mortgage funding.
How to Qualify for Mortgage Loan Insurance
To qualify for mortgage loan insurance, you’ll need a minimum down payment. The amount of this down payment depends on the home’s purchase price. For homes that cost less than $500,000, the minimum down payment is 5%. For homes that cost between $500,000 and $1 million, the minimum down payment is 5% for the first $500,000 and 10% for the remaining amount. For homes that cost more than $1 million, the minimum down payment is 20%.
Cost of Mortgage Loan Insurance
If you require mortgage loan insurance, your lender will pay an insurance premium on your behalf. This premium is calculated as a percentage of the mortgage and is based on the size of your down payment. Your lender will likely pass this cost on to you, either as a lump sum payment or by adding it to your mortgage and including it in your monthly payments.
For example, if you have a down payment of 5%, the premium rate would be 4%. This means that you would need to pay a premium of 4% of the total mortgage amount. If the mortgage amount was $300,000, you would need to pay a premium of $12,000. This could either be paid as a lump sum or added to your mortgage payments.
Overall, mortgage loan insurance is an important product for those who cannot afford a large down payment.