Mortgage insurance is an insurance product that protects the lender in the event that the property owner defaults on their mortgage payments. It can also cover unforeseen events like the property owner passing away, or not being able to make their mortgage payments for any other reason. Lenders take on risk when they write a mortgage, and some mortgages are seen as riskier than others, and that’s where this insurance comes into play.
Generally speaking, if somebody isn’t able to continue paying their mortgage, the lender will foreclose on the property and sell it to recoup their money. If the property owner has been paying their mortgage for a while, that equity is going to help the bank or lender break even, at the very least. The down payment also helps them to break even, but in some cases, the down payment is too small for them to deem the mortgage safe enough to issue without having additional mortgage insurance.
What is mortgage insurance and how does it work?
Paying a mortgage insurance premium is a process that exists to protect the lenders, but it also allows you to buy a property that you may not be able to afford otherwise due to the requirement of high down payment. This can be risky for the lender, but also for you as the buyer. If there’s any chance you could end up defaulting because your monthly payments are too high, you risk losing a lot so it’s always wise to buy a property within your means.
Mortgage insurance can be paid upfront when the mortgage is first created, or it can be paid on an on-going basis, it will depend on the terms and which company you go with.
In Canada, the CMHC (Canadian Mortgage and Housing Corporation) exists with a goal of helping everyone achieve affordable housing. It’s a corporation that is owned by the Canadian government, and they operate as a Canadian mortgage insurer to help people secure mortgages for up to 95% of a property’s value, and when people aren’t able to afford the full 20%+ down payment. In Canada, as in America, it’s necessary to get mortgage insurance when you have less than 20% of the down payment.
What is mortgage life insurance?
Mortgage life insurance is different than term life insurance. With the former, the benefits of life insurance are paid out to the mortgage lender (often the bank). With the latter, term life insurance, the benefits are paid to the surviving family members, a trust, etc.
What is mortgage title insurance?
Here’s another type of mortgage insurance that is a required insurance premium if you want to take out a mortgage loan to buy a property. Part of the buying process involves paying a lawyer to do a title search, in case there are any liens against the title of the property. The title search is required to ensure that the person selling the real estate is actually authorized to do so, and usually, it will catch any discrepancies, but not always. In the event that a sale is made invalid, the title insurance can project the policy holder against losses and damages.
Is mortgage insurance necessary?
CMHC insurance is necessary when you aren’t able to cover the 20% down payment, which can add up to a lot of cash when you’re looking at the average price of properties. Needing to gather up $60k, $80k or more can be tricky and makes housing less accessible to working-class people, which is why insurance on mortgage payments exists in the first place.
Elsewhere in the world, there may be public or privately owned mortgage insurers that can help you when you aren’t able to make a large enough down payment. In any case, the exact rules can vary from country to country. In North America, lenders want you to have this costly insurance if you aren’t making a large enough down payment. Not having the money upfront for the down payment ends up costing you more in the long run, but it enables you to afford your own house when you might not be able to afford it otherwise, and this enables you to build equity in your property instead or renting, so there are still benefits to buying a property even if you need mortgage loan insurance to make it happen.
How can I avoid mortgage insurance?
Mortgage insurance can be pricey, so avoiding it is a good idea if you’re able to. If you want to avoid having to buy PMI (private mortgage insurance), you’ll need to spend a little more time saving up money in order to not need it. Once you’ve built up equity, and when it’s time to refinance, you may be able to avoid continuing to need this insurance. Some people will take out a second mortgage on the property and they’ll use that money to make a larger down payment.