When you buy a home, there are two very distinct types of mortgage insurance that may come into play – one is Mortgage Loan Insurance and the other is Mortgage Life Insurance. Even the names sound similar, but these two types of coverage have completely different purposes and benefits. Unfortunately, consumers sometimes confuse the two. That confusion can result in the homebuyer not really understanding what they’ve bought or making the wrong choice when deciding on coverage. Either way, you need to know the difference.
Both types of mortgage insurance will typically be raised by your mortgage lender at the time of financing. Mortgage Loan Insurance is for what is considered a high risk loan and this is determined by the amount of your down payment. If you have what is called a high ratio mortgage (less than 20% down payment) and you’re financing through a major Canadian financial institution, you’ll be required by law to take out mortgage loan insurance and you’ll be required to pay the insurance premium. Mortgage insurance protects the lender if you don’t make your payments. It doesn’t protect you, the buyer, but you must pay the premium.
For most people the hardest part of buying a home, especially the first one, is saving the down payment. Many people won’t have 20% of the purchase price to put down. With mortgage loan insurance, buyers can put as little as 5% down. Then, if the borrower defaults (fails to pay) on the mortgage, the lender is paid back by the insurer. With Mortgage Loan Insurance, many buyers who might not otherwise qualify for a loan can still get the financing for their home purchase. This stimulates the Canadian economy, while at the same time protecting our lending institutions and the stability of our overall federal economy.
CMHC (Canada Mortgage and Housing Corporation), the federal government’s housing authority, is a major provider of this type of insurance in Canada. For that reason, Mortgage Loan Insurance is frequently referred to as CMHC insurance. For more information visit the CMHC web site www.cmhc-schl.gc.ca.
The second type of mortgage insurance — Mortgage Life Insurance – is optional coverage you can elect to buy if you want to ensure that your mortgage will be paid in full if you or a co-owner dies. It is essentially term insurance with coverage that reduces with your mortgage principal. It can be set up as joint coverage for multiple owners, with the benefit falling to the survivor(s) if one owner dies before the mortgage is paid off. Mortgage Life Insurance is offered by a number of carriers and the rates and coverage will vary according to the insurance company offering the coverage and your own personal information.
Your Coldwell Banker® real estate professional can tell you more about mortgages, insurance and the entire home buying process. Why not call today, and take advantage of their helpful advice? You’ll be glad you did!