Is Mortgage Life Insurance Mandatory In Canada
Living through the pandemic has given Canadians a lot to think about. Daily news items about hardships families are going through gives us all pause.
One topic of discussion in households these days centers on insurance. For example, did you know Canadian insurers paid out more than $154 million for COVID-19 related deaths in 2020?
You might be asking yourself some important questions about protecting your family. So, if you’re planning on buying a home, the subject of mortgage life insurance might have come up.;
So;now you’d like;to know, is mortgage life insurance mandatory in Canada?
To answer this important question and more, keep reading. Here is a complete insurance guide and how it impacts your mortgage. Let’s begin by explaining the meaning of mortgage life insurance.
How Much Does Pmi Cost
The average range for PMI premium rates is 0.58 percent to 1.86 percent of the original amount of your loan, according to the Urban Institute. Freddie Mac estimates most borrowers will pay $30 to $70 per month in PMI premiums for every $100,000 borrowed. How much you will pay for PMI depends on two key factors:
- Your loan-to-value ratio How much you put down will impact how much youll pay for PMI. For example, if you put down 5 percent, your LTV ratio would be 95 percent. If you put down 15 percent, your LTV ratio would be 85 percent. When you can only make a small down payment, the lender is assuming a bigger risk, and your PMI payments will be higher to account for that risk.
- Your credit score Your credit history and corresponding credit score play a major role in the cost of PMI. For example, consider the Urban Institutes example of someone buying a $250,000 property with a 3.5 percent down payment. With an excellent FICO score of 760 or greater, the monthly mortgage payment including the insurance is $1,164. For a buyer with a credit score between 620 and 640, those monthly payments are $1,495 a reflection of a significantly higher PMI charge.
Heres a look at how PMI might play out based on how much you put down, according to the Freddie Mac mortgage insurance calculator and the Bankrate mortgage calculator. These examples assume a $329,000 purchase price and a 3.25 percent interest rate, and do not account for homeowners insurance and property taxes.
How Is Personal Life Insurance Different
Personal life insurancepays;money;if;you;die while covered under the policy. With personal life insurance the homeowner typically owns the policy. Unlike mortgage life insurance benefits, this money can be used however your beneficiary or beneficiaries see fit.;
For example,;your family or other beneficiaries;could use the proceeds to pay for post-secondary tuition, credit card debt, or other living expenses.Personal life insurance can be purchased for a termthat is unrelated to the length of your mortgage. Your personal life insurance;policy isnt;linked to your mortgage and;wont;end because your mortgage is paid off, or;youve;moved it to another financial institution. The amount of your mortgage life insurance is linked to the declining balance of your mortgage and will;go down;over time, while your personal life insurance coverage typically;wont;decrease.;
Personal life insurance can;work for you today;and;also;be flexible to your changing needs. You may be able to make significant adjustments to a personal life insurance policy without heavy fees. Its possible your familys financial situation will change as you have children , and personal life insurance can more easily handle these new financial realities.;
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Whats The Difference Between Mortgage And Home Insurance
Mortgage insurance and home insurance arent the same thing. While theyre both types of insurance, one protects your lender and one protects you. To make sure youve got the coverage you need, take the time to know the difference between the two.
Home insurance provides you with protection for your dwelling, belongings and liability. On the other hand, mortgage insurance protects the lender from financial losses should you be unable to pay your mortgage each month. As you probably already know, home insurance is mandatory. But mortgage insurance? Thats a different story.
Example: How To Calculate Your Minimum Down Payment
The calculation of the minimum down payment depends on the purchase price of the home.
If the purchase price of your home is $500,000 or less
Suppose the purchase price of your home is $400,000. You need a minimum down payment of 5% of the purchase price. The purchase price multiplied by 5% is equal to $20,000.
If the purchase price of your home is more than $500,000
Suppose the purchase price of your home is $600,000. You can calculate your minimum down payment by adding 2 amounts. The first amount is 5% of the first $500,000, which is equal to $25,000. The second amount is 10% of the remaining balance of $100,000, which is equal to $10,000. Add both amounts together which gives you total of $35,000.
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Whats Mortgage Insurance And Who Has To Pay It
Mortgage insurance is designed to protect your lender if you cant make your payments.
Its usually required when a borrower gets a conventional mortgage and makes a down payment thats less than 20% of the homes purchase price. Some buyers may not put that amount down simply because they cant afford to do so. Others might prefer to keep the down payment smaller to free up more cash on hand for repairs, remodeling, emergencies, or other eventualities.
To be clear, mortgage insurance does not insure the home, but rather, it insures the loan.
If somebody has a conventional loan and they only put 5% down meaning that the lender is going to lend 95% theyre going to say OK, were going to charge you mortgage insurance, explains Carl Young, a top-selling agent based in the Knoxville, Tennessee region who works with 75% more single-family homes than other agents in his area. The mortgage insurance remains in place, he says, until the buyer can drop it because youve accrued 20% or more in home equity.
Katie Padgett, an agent on Youngs team, further explains that mortgage insurance is going be set up by the lender to protect them. It really doesnt have anything to do with the house per se. Its actually just protecting the loan itself because the lender is looking at it as a way of getting value back on what they loaned to you in the event of a default.
Pmi Vs Guarantee Fees
Another mortgage option, a USDA loan, requires the borrower to pay a guarantee fee, which is similar to, but distinct from, mortgage insurance. USDA loans help reduce the cost for home buyers living in rural areas and in some suburban areas. As with FHA loans, rates are set by the government, but USDA rates are generally lower.
At this time, Rocket Mortgage® doesnt offer USDA loans.
What’s The Difference Between Homeowners Insurance And Mortgage Insurance
You dont need to be an insurance expert when you set out to buy your first home, but it can be a challenge when you come across the terms homeowners insurance and mortgage insurance for the first time. As you learn about your insurance needs at this important new milestone in your life, it may help to know that there is a difference between homeowners insurance and mortgage insurance. Depending on many factors, not every home owner needs mortgage insurance, but to ensure their new home is sufficiently protected, homeowners insurance is usually a necessity.
As you start house hunting and explore the process of getting pre-qualified for mortgage loans, heres a look at each type of insurance, why you would need it, what it can help cover and when you might buy it.
How Long Do Guarantee Fees Last
The downside here is that guarantee fees live for the life of the loan. The only way to get rid of them is by refinancing into a conventional loan and requesting PMI removal after you reach 20% equity.
This isnt common, but there are cases in which you can receive your loan directly from the USDA. In these instances, there are no guarantee fees.
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How Does Mip Work
If you have an FHA loan, you pay a portion of the premium up front at the close of the loan and then continue to pay mortgage insurance premiums on a monthly basis. The upfront premium is always 1.75% of the loan amount. If you cant afford to pay this at closing, it can be financed into your loan amount.
In addition to the upfront premium, theres an annual premium thats based on your loan type as well as your down payment or equity amount. If you have a standard FHA loan with a 3.5% down payment on a loan of no more than $625,500, the annual MIP is 0.85% broken into monthly payments.
If you have an FHA Streamline where you go from one FHA loan to another for the purpose of lowering your rate and/or changing your term, the MIP rates are a little better. In this case, theres an upfront rate of 0.01% of your loan amount and an annual MIP rate of 0.55%.
For The Lender Private Mortgage Insurance Can Provide:
- Broader range of loan products
- Expanded pool of buyers with lower cash requirements
- Wide range of insurance products
- Faster, easier closes
- Reduced exposure
The ability to originate loans for borrowers with less than a 20% down payment is critical to serving first time homebuyers and expanding the opportunity of homeownership.
With affordable home prices and low interest rates, this is a great time for buyers to enter the market.; Private mortgage insurance allows buyers to purchase homes sooner while providing safer loans for lenders.
To learn more about the benefits of mortgage insurance, watch our MI fundamentals videos:
|Mortgage Insurance Fundamentals|
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Natural Value Increase Cancellation
If youre requesting removal of your PMI based on natural increases in your property value 2 5 years after your loan closes, both Fannie Mae and Freddie Mac require a new appraisal, and the LTV has to be 75% or less. If your removal request comes more than 5 years after your closing, the LTV can be 80% or less with a new appraisal. These requirements apply to insurance removal based on market value increases not related to home improvements.
On a multi-unit residence or investment property, you can cancel PMI on your own when LTV reaches 70% based on the original value with Fannie Mae. Freddie Mac requires 65% for cancellation. Keep in mind that if youre requesting removal based on home improvements from Fannie Mae, you must have had the loan for at least 2 years prior to requesting PMI removal on your investment property.
Who Has To Pay Pmi
Conventional borrowers who put down 3% to 19.99% have to pay PMI. Borrowers who pay PMI are more likely to be first-time homebuyers;and are usually purchasing, not refinancing. ;They also tend to have slightly higher debt-to-income ratios and lower credit scores than conventional borrowers who dont pay PMI, according to the Urban Institute.
Depending on the year, about one-quarter to one-third of borrowers who get a conventional mortgage pay PMI, on average.;In the first quarter of 2019, paying PMI was most common among homeowners in the District of Columbia , North Dakota and Minnesota .
What Is Mortgage Life Insurance
You can buy this type of policy as protection if you, as the borrower, die during the mortgage term. In that event, the policy will pay off or pay down the mortgage amount on the policy.
Surviving family members will not have to take on the extra burden from lost income. Instead, an insured amount equal to the outstanding debt pays off the mortgage for the surviving family.
There are benefits to this kind of insurance. For example, where there is only one income earner, this protection allows families to stay in their homes. Your;mortgage will have at least been paid by the policy, but no funds go directly to family members.
Mortgage life insurance terms have the same duration as the mortgage term. Also, with the policy arranged at the same time as the mortgage, the premium never changes. Be aware, however, that as your mortgage amount decreases, so will the value of the policy.;
If the unthinkable happens, any other insurance can go to other expenses. This is helpful when survivors need to think about funeral costs or other expenses. But, at;the same time, let’s prevent any confusion with other types of insurance.
How To Get Rid Of Mortgage Insurance
The process for getting rid of mortgage insurance depends on which type you have.
For a conventional mortgage with borrower-paid monthly premiums, you can get rid of PMI after you accumulate 20% equity by paying down your mortgage. You can also get rid of PMI if:
- Your homes value goes up enough to give you 25% equity, and youve paid PMI for at least two years
- Your homes value goes up enough to give you 20% equity, and youve already paid premiums for five;years
- You put extra payments toward your loan principal to reach 20% equity faster than you would have through regular monthly payments
Youll need to ask your lender in writing to waive PMI if one of these things happens. For cancellation based on an increase in home value, your lender may require an appraisal. Youll also need to be current on your payments and have a good payment history for the lender to grant cancelation at this point.
The passive way to get rid of insurance is to make mortgage payments every month until you have 22% equity. Federal law requires your lender to cancel PMI automatically at this point as long as youre current on payments.
Another way you might get rid of PMI is through refinancing to get a lower rate or shorter term. You wont need PMI on the new loan if your homes value has gone up enough or you do a cash-in refi, which means making a lump-sum payment at closing to lower your mortgage balance.
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Cost Of Private Mortgage Insurance
The cost of your PMI premiums will depend on several factors.
- Which premium plan you choose
- Whether your interest rate is fixed or adjustable
- Your loan term
- Your down payment or loan-to-value ratio
- The amount of mortgage insurance coverage required by the lender or investor
- Whether the premium is refundable or not
- Your credit score
- Any additional risk factors, such as the loan being for a jumbo mortgage, investment property, cash-out refinance, or second home
In general, the riskier you look according to any of these factors , the higher your premiums will be. For example, the lower your credit score and the lower your down payment, the higher your premiums will be.
According to data from Ginnie Mae and the Urban Institute, the average annual PMI typically ranges from .55% to 2.25% of the original loan amount each year. Here are some scenarios: If you put down 15% on a 15-year fixed-rate mortgage and have a credit score of 760 or higher, for example, you’d pay 0.17% because you’d likely be considered a low-risk borrower. If you put down 3% on a 30-year adjustable-rate mortgage for which the introductory rate is fixed for only three years and you have a credit score of 630, your rate will be 2.81%. That happens because you’d be considered a high-risk borrower at most financial institutions.
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Types Of Mortgage Insurance
The type of mortgage insurance youll pay depends on your loan type. Keep in mind that lenders talk about mortgage insurance in annual terms. But you dont pay it once per year. Lenders break up the annual amount into 12 equal installments. You pay it each month along with your mortgage payment
The different types of mortgage insurance are as follows:
- Conventional loans have an annual private mortgage insurance premium
- FHA loans have an upfront and annual mortgage insurance premium
- USDA loans have an upfront and annual mortgage insurance fee
- VA loans have an upfront funding fee, but no annual premiums
Upfront mortgage insurance fees are due at closing, though you may have the option to roll them into your loan instead. Annual premiums adjust each year based on your remaining mortgage balance, and, as mentioned, they are divided into 1/12th installments and included in your monthly mortgage payments.
How Much Is Usda Mortgage Insurance
Loans backed by the U.S. Department of Agriculture are available if you are buying a home in eligible rural and suburban areas and meet the income requirements. USDA loans, which have a 0% down payment requirement, are intended for low- to moderate-income homebuyers.
Borrowers pay an upfront mortgage insurance fee of 1% on USDA loans, though they can often roll this into their loans. The annual mortgage insurance fee for USDA loans is 0.35%, or about $29 per month, per $100,000 borrowed.
The annual USDA mortgage insurance fee is in place for the life of the loan. However, as with FHA loans, you can refinance to a conventional loan once you have 20% equity in the home.
Learn more: USDA Loans: A Zero-Down Loan For The Suburbs
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