So you want to invest in a new home. We’ve all heard of a down payment, but have you heard of private mortgage insurance? Private mortgage insurance may be necessary if you plan on borrowing more than 80% of the cost of the home. For those that refinance, private mortgage insurance may be required if your established home equity is under 20%. So what exactly is private mortgage insurance, what does it do, and how does it work?
Mortgage insurance is designed to protect the lender of your new mortgage loan if you default on your loan. It does not offer any protection for a home buyer. For private mortgage insurance, you are required to pay a one-time premium. This premium is a percentage of your mortgage ranging from 0.6% to 4.5% and can be added to your mortgage (which will increase the premium) or if you prefer can be paid upfront to keep the interest on your loan down.
Prospective homebuyers who intend on putting down less than 20% of the home value as their down payment will be required to take out mortgage loan insurance. Also, homebuyers who are self-employed or that have poor credit may also be required to take out mortgage insurance regardless of the amount they put down as a down payment.
You do not need to apply for mortgage loan insurance; during your mortgage application process, if you are required to take out PMI, your Calgary mortgage lender will let you know. The lender will handle the arrangements for your mortgage insurance. Your PMI premium will vary depending upon the size of your loan and the amount you are putting down as a down payment.
Ultimately it is a better choice to put down a bigger down payment if that option is within your budget; you won’t have to take out private mortgage insurance, and it can also reduce interest on your mortgage loan. If that is not an option, paying for your PMI up front instead of adding it to your mortgage can save you from paying more interest every month until your loan is paid.