December 2, 2013
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.
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