The Basics of Mortgage Insurance

Purchasing a home is a dream for most. For those who can’t afford the 20 percent down payment, mortgage insurance can make that dream a reality. Here’s what you need to know about it.

If you default on your mortgage, mortgage insurance protects your financial institution from losing money. Here’s the breakdown: if you purchase a $100,000 home and put 10 percent down ($10,000), then the lender is responsible for 90 per cent ($90,000). So, $90,000 is then multiplied by 0.005 per cent for an annual mortgage insurance of $450, or $27.50 per month.

In today’s market, avoiding mortgage insurance is difficult. However, even if you can’t afford to put 20 percent down when purchasing a home, there are things you can do to try and avoid mortgage insurance:

• Talk with your lender, he or she may have a less than 20 per cent rule in place if you have a good credit score
• Obtain an 80-10-10 loan. On this plan, 90 per cent of the loan is financed with a first mortgage equal to 80 per cent of the sale price. Then, a second mortgage with a higher interest is applied for the remainder of the sale price. The monthly payments for these two mortgages are usually lower than paying one mortgage with mortgage insurance.
• Tell your lender that paying mortgage insurance is a deal-breaker for you, and that you will take your business elsewhere if it isn’t waived.

Home Considerations

When you’re looking for a home to buy, only look at properties you can afford without putting yourself in a financial crunch. Remember, you will still need money to decorate and furnish your home, pay for an inspection and utilities, and more. All of these expenses can add up quickly, so it’s best not to stretch yourself too thin.