If you’re a new home buyer, than perhaps you might be aware that if you don’t have 20% to put down as down payment on your home than you may be required to get mortgage insurance to make up the difference. Mortgage insurance allows a potential home buyer who may have as little as 5% to use as a down payment to buy a home.
Mortgage insurance is also know as loan insurance. The lender has to pay a premium for this loan insurance which they then pass on down to the home buyer. The home buyer has the option of either paying this loan insurance as a single payment or have it added onto their monthly mortgage payment as an extra cost.
Many if not most people have this mortgage insurance through the Canada Mortgage and Housing Corporation (CMHC), although there are other providers, so you should always do your research to ensure you get the best rates.
To qualify for mortgage insurance you cannot be purchasing a dwelling which is more than 1 million dollars and must have a loan-to-value ratio that is more than 80%. Your down payment minimal will also depend on the type of dwelling you are buying.
You will need a minimal of 5% as a down payment for any dwelling which is classified as a single family or a 2-unit dwelling. If you are looking at a dwelling which is a 3 or 4 unit dwelling, you will be required to have a minimal of 10% as a down payment.
Also, a lender will be looking at your total income versus all of your expenses to ensure that you can afford the purchase and mortgage payments for a new home. A basic rule of thumb is that your current debt shouldn’t be more than 40% of the total of all the income which your household currently makes.
You should also be aware that there are legal and closing fees involved when you take out a mortgage. These are additional costs that you need to factor in your budget when buying a home. These fees can range anywhere from 1.5 to as much as 4% of the purchase price of the home.
If you’re wondering what you will have to pay as mortgage insurance, it can vary significantly from situation to situation. The best way to find out much it might cost would be use to a mortgage calculator or view the tables which can be found at the CMHC web site.
You might also be wondering if there is anyway you can avoid paying mortgage insurance. There are two ways you can do this and the first simply entails avoiding mortgage insurance altogether. You are not off the hook because the lender will be charging you a higher interest rate and much higher administrative fees, so it could end up costing you even more over the long run.
The second way to avoid mortgage insurance and which is becoming increasing popular is to take out a second mortgage to make up the difference of the down payment to meet the 20% requirement. With interest rates still so currently low, it may be more cost effective for you to take out this approach than accessing and paying for mortgage insurance.
If you’re not sure which is the best approach than you might be well advised to talk to a mortgage broker who can give you a better idea of where you stand and the most cost effective strategy to use when buying a home.
Photo by revdancatt
