What is mortgage loan insurance, and how does it work

What You Need to Know About Mortgage Loan Insurance

 

Mortgage loan insurance is a type of insurance required by lenders when homebuyers purchase with a down payment of less than 20% of the purchase price. This insurance premium protects lenders in the case the homebuyer defaults on the loan. This premium is at the expense of the lender but usually passed on to the purchaser. In most cases, the premium is usually added to the mortgage loan amount, so it isn’t an extra upfront cost, but instead, one amortized over the life of the mortgage.

How do you calculate a mortgage loan insurance premium?

The premium is calculated depending on the size of the down payment in relation to the home purchase price.

Down Payment (% of home purchase price)
5% – 9.99% 10% – 14.99% 15%-19.99% 20% or higher
3.15% 2.40% 1.80% 0.00%

 

Let’s say you just purchased a home for $300,000 and made a $40,000 down payment. Your mortgage default insurance premium would be calculated as follows:

Step 1:
Calculate your down payment as a % of your home price
$40,000 / $300,000 = 13.33%
Step 2:
Find your insurance premium rate in the chart
Insurance premium percentage is 2.40%
Step 3:
Calculate your mortgage amount
$300,000 – $40,000 = $260,000
Step 4:
Calculate your mortgage insurance premium
$260,000 x 2.40% = $6,240

 

How do you pay mortgage default insurance?

Mortgage default insurance is financed through your mortgage. Unlike closing costs, such as legal fees and land transfer tax, it does not require a lump sum cash outlay at the time you purchase your home. Instead, your mortgage default insurance premium is added to your mortgage amount and paid off over the life of your loan. Continuing with the above example, the revised mortgage amount would be $260,000 + $6,240 = $266,240; this is how much you would need to borrow from your lender, in order to purchase your home.

If you have any other questions related to this article, or any other mortgage related topics, please either send me an email at sameer@spmortgage.ca, or give me a call at 778-822-5466. I am ALWAYS available for you!

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Hardworking, Ambitious & Detail-Oriented, Sameer can be counted on for any financing needs you may require. Working in all aspects of financing(residential, commercial and private), Sameer has a passion for helping his clients, and making the mortgage process as smooth and stress free as possible.