Mortgage loan insurance may be a requirement by your mortgage lender and its premiums should not be overlooked. When a homebuyer puts down less than 20% of the purchase price as a down payment the law will require mortgage loan insurance is purchased.
The purpose of this type of insurance is to ensure the lender of the mortgage is protected in the case that there is a mortgage default. For the homeowners it gives the opportunity to purchase a home with little or no downpayment and let them build equity sooner. Understand that in the event of a default on the mortgage payment this insurance does nothing for the homeowner. It is simply there to protect the lenders interest in the money lent. In Canada, mortgage loan insurance is normally provided by CMHC, a publicly traded company, or a government sponsored program. CMHC (Canadian Mortgage and Housing Corporation) is the most common provider. The premium for mortgage insurance is dependant on the amount of the mortgage and usually ranges from 0.65% and 2.75% of the total mortgage amount. Interest rates on this insurance are comparable to those on the regular mortgage. The premiums can be paid up front in a lump sum or can be paid monthly along with the mortgage payments. Keep in mind that if you are planning on building an energy efficient home or renovating your current home to make it more energy efficient you may be eligible for a 10% refund on mortgage loan insurance premiums. Mortgage loan insurance has had a positive effect on the Canadian housing finance system because it helps to create a more stable environment for the lenders regardless of slow economic times and recessions.
Mortgage loan insurance is not to be confused with mortgage life insurance. Mortgage life insurance will not protect a mortgage default but guarantees that the mortgage remaining will not be a burden to the estate if the lender dies.
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