The Pros and Cons of Mortgage Insurance

Home buyers who are unable to pay a 20% down payment on their mortgage are required to pay additional insurance to protect the lender in case the buyer defaults on the loan. These loans are provided by the Canadian Mortgage and Housing Corporation (CMHC) to protect the bank and pay your premiums if you cannot. This type of insurance is mainly in place to benefit the lending establishments but can benefit buyers by helping them get into the housing marketplace earlier than they would otherwise be able.

In order to qualify families are required to provide a down payment of at least 5% for single-family or two-unit dwellings and a minimum of 10% for three- or four-unit dwellings. The total monthly housing cost must not exceed 32% of gross family income and total debt load must not exceed 42% of gross family income. Buyers with steady income will likely have lower insurance premiums than those who are self-employed as they are perceived as lower risk for the lending institution. Buyers who opt for the longest amortization terms may also pay extra fees for the added convenience. Energy efficient homes on the other hand may be eligible to receive a 10% refund on this insurance as well as the ability to extend amortization to 30 years without penalty.

In most cases PMI is added to monthly mortgage payments and many lenders automatically drop these payments once the buyer has reached a certain threshold of equity in their home. As this only applies to buyers who have paid their mortgage premiums on time, be sure to stay on top of your mortgage payments to avoid having to pay these extra insurance rates for longer than necessary.

Pros

• Unlike life insurance, mortgage insurance has very high acceptance rates and can sometimes be used to protect family members from mortgage default upon your death or disability. It can be a great boon for those in riskier jobs or with health concerns that make life insurance or disability insurance harder to obtain.
• Provides peace of mind for those with tight budgets.
• Will allow families to purchase their first home earlier than they would otherwise be able.

Cons

• Maximum payment limitations mean that if you suddenly lose your job your policy will not provide an equal sum of money but a pre-calculated amount that will cover costs but encourage you to return to work as quickly as you are able.
• If your mortgage payments are low insurance may not be worth it as there is little risk you will be unable to pay premiums in the future. If you have a comfortable nest egg of a few months worth of salary in case of unexpected expenses, you may not need to pay the extra premiums associated with mortgage insurance.
• As the amount of your mortgage is constantly declining thanks to your prompt payments, the amount of affective coverage you are receiving from your policy is in constant decline. Your premium amounts, however, will remain the same.