The Ultimate Guide to Mortgage Insurance For First Time Home Buyers
You’ve got your mortgage in hand, you closed on your house, you have everything you need to start moving in and now people are telling you to get mortgage insurance. You start looking look on Google, and everything becomes a hundred times more confusing. What's the difference between mortgage loan insurance and protection insurance? And do you even need it? In this comprehensive guide, we'll take the time to break down what all the confusing terms of mortgage insurance mean. From understanding the basics of mortgage insurance to diving into the different types available, we'll cover it all.
What Is a Mortgage?
A mortgage is a loan you take from a bank or a mortgage lender to buy a house or property. You borrow a certain amount of money to purchase the property, and then you pay it back over a period of time, usually 15 to 30 years, in monthly installments. The property itself serves as collateral for the loan, which means if you fail to make payments, the lender can take the property back.
Where Can You Get a Mortgage?
You can get a mortgage from banks, such as Scotiabank, TD, RBC, credit unions, or other financial institutions that offer mortgage loans. There are also specialized mortgage lenders who focus solely on providing home loans. Additionally, you can work with mortgage advisors, such as GRFS, who can help you compare offers from different lenders to find the best mortgage deal for your situation.
It’s important to be comfortable with the lender and the mortgage options they offer you right from the start. You may have to pay a prepayment penalty if you switch lenders after signing your mortgage contract. Make sure you understand the terms and conditions of your mortgage contract.
Different Types of Mortgage Insurance
The term mortgage insurance is a very broad term and can mean different things. However, when people say mortgage insurance, they often refer to either mortgage default or protection insurance.
What’s the Difference Between Mortgage Loan Insurance and Mortgage Default Insurance
Mortgage loan insurance and mortgage default insurance are the same thing. If your down payment is less than 20% of the home’s purchase price, you need mortgage loan insurance; you cannot buy a house without it. Mortgage loan insurance protects the bank in case you default on your payments; it does not protect you or your interest in the property. This type of insurance is usually automatically applied and normally incorporates the cost of the premium in your mortgage amount.
There are 3 major insurance companies in Canada that offer mortgage loan insurance. CMHC, Sagen and Canada Guaranty. As a buyer, you won’t likely deal with your mortgage insurance company directly. Your bank or mortgage lender will apply for mortgage loan insurance on your behalf.
What’s the Difference Between Mortgage Protection Insurance and Mortgage Life Insurance
Mortgage protection insurance, sometimes referred to as mortgage life insurance, on the other hand is a type of insurance policy that helps pay off your mortgage in the event of your death, disability, or critical illness. It provides financial security for your family by ensuring that they can continue to make mortgage payments and stay in their home if something happens to you.
Mortgage protection insurance can come in different forms, such as life insurance, disability insurance, or critical illness insurance, and the coverage and benefits can vary depending on the policy.
Mortgage protection insurance is also optional and is not required to buy a home.
The Difference Between Mortgage Default Insurance and Mortgage Protection Insurance
Mortgage default insurance
Mortgage insurance is required if your down payment for a home is less than 20%.
It safeguards your lender in case you are unable to repay the loan, but it does not offer any protection for you or your property.
Your lender will typically arrange the insurance on your behalf if necessary, and the premium cost is usually included in your mortgage amount.
The premium is calculated as a percentage of your mortgage loan, determined by factors like the size of your down payment and the outstanding balance on your mortgage.
Mortgage protection insurance
Mortgage protection insurance provides financial security by paying off your mortgage balance in the event of death, critical illness, disability, or covers mortgage payments during periods of unemployment.
You have the option to add this insurance at any time through your lender.
The premium amount is determined by factors like your mortgage balance, age, and monthly payment amount at the time of application.
Other Types of Insurance
There are other types of insurance terms that you may come across, such as:
Title Insurance
Title insurance is an insurance policy that protects residential or commercial property owners and their lenders against losses related to the property’s title or ownership.
It can also simplify the closing process for your lawyer, thereby saving you time and money. It is also not a requirement in Ontario.
Mortgage Disability Insurance
Mortgage Disability Insurance is another term for mortgage protection insurance. It will help cover the cost of your mortgage if you become disabled in any capacity
CMHC Mortgage Loan Insurance
CMHC mortgage loan insurance is just referring to mortgage loan insurance offered by the insurance company Canada Mortgage and Housing Corporation (CMHC).
Conclusion
In this guide, we've taken a stroll through the world of mortgage insurance to help you understand what all the confusing terms mean. By breaking down these insurance jargons in a more relaxed and easy way, we hope you feel more confident in navigating the world of homeownership and protecting your investment.
As mentioned, Grand River Financial Solution is a trusted mortgage advisor. Start the conversation and see exactly how you can save the most on your home & mortgage. Timing the market is a challenge to begin with. Speaking with a mortgage advisor can set you up to act quickly when the time is right!
