The Truth About Mortgage Insurance

As you plan to buy your home, you may find yourself overwhelmed by all of the added costs that go into a mortgage payment. Many home buyers have to pay for private mortgage insurance, also known as CMHC mortgage insurance. It typically adds just a small amount to the monthly payment, but it’s important to keep it in mind as you search for a home. 

Learn more about PMI, and whether or not you’ll need it.

What Mortgage Insurance Covers 

Mortgage insurance is something that covers the lender, not the homeowner. If you were to default on your loan, the PMI will help the lender recoup their losses. Few people default on their loans, so it doesn’t come into play often, but you will likely need PMI for the lender to approve your loan. 

It’s important to note PMI is not the same as homeowners’ insurance. Homeowners’ insurance protects you, the homeowner, in case of damage to the home. It should cover the full cost of replacing the home. You will definitely need homeowners’ insurance, and this also adds to the monthly payment. 

Mortgage Insurance and Down Payments 

Your need for mortgage insurance largely depends on the size of your down payment. Those who have a down payment that’s greater than 20 per cent of the home’s purchase price do not need to get mortgage insurance. 

If you’re currently planning to put 18 or 19 per cent down, you may be better off waiting a few more months to save up the full 20. In doing so, you’ll reduce your monthly mortgage payment because you won’t have to pay PMI. 

Mortgage Insurance and Pricey Homes 

CMHC insurance is not available for homes over $1 million. In practical terms, this means if you want to purchase a home exceeding this limit, you’ll need to have a down payment that exceeds 20 per cent of the home’s purchase price.

Getting Rid of Mortgage Insurance 

Some mortgage types require you to pay mortgage insurance for the entire duration of the loan. Others will automatically remove the insurance once you’ve reached 20 per cent equity in your home. This typically requires a new assessment to determine that the value of the home hasn’t dramatically increased or decreased and that the equity you have is 20 per cent of the home’s current value. Ask your lender whether they will remove the mortgage insurance automatically. 

Alternatively, once you have 20 per cent equity in the home, you can refinance your mortgage to a plan that doesn’t include mortgage insurance. Planning to do this is a bit risky. You don’t know whether mortgage rates will increase by the time you’re ready to refinance. It’s also possible that fees on top of the rates will make your monthly payment higher if you refinance. Carefully check all of your options before you refinance just to get rid of the mortgage insurance. It may not make sense. 

Do You Want Mortgage Insurance? 

In general, people want any type of insurance that will protect them, but this isn’t the case in private mortgage insurance. It protects the lender, not you. While it might only add $20 to $50 to your monthly payment, you don’t want to pay for something that doesn’t directly benefit you. You don’t want mortgage insurance. 

In most cases, though, you won’t have a choice about getting mortgage insurance. You can choose to save up more than the 20 per cent, but if that will take a long time, you’re probably better off getting the home and having mortgage insurance. 

However, you may have a choice when it comes to the type of mortgage you get. Look for a mortgage that will allow you to remove the mortgage insurance once you reach 20 per cent equity in the home. This is the best option for those who can’t save up 20 per cent as a down payment and don’t want to refinance down the line. 

For many homebuyers, CMHC insurance is a necessary evil. The good news is it doesn’t add much to the monthly payment and you can often get rid of it once you increase your equity. Don’t let this minor cost stop you from getting into the home of your dreams.

Photo credits: money house, married couple