Want to buy a house, but you just can’t save that entire 20% for the down payment? Well, luckily for you, there is another way. You can purchase your first property with as little as 5% down. What’s the catch? The catch is that you have to pay a mortgage default insurance premium. As with most things in life, this has pros and cons. Keep reading to see if this might be the right option for you.
What exactly is mortgage default insurance? To put it simply, it’s a way for the lenders to protect themselves if the borrower were to stop making payments and default on their mortgage. The premium is paid by the lender and then added to the total loan amount of the mortgage. Then as part of your mortgage, you pay it back to the lender with interest. The insurance premium can be paid as a lump sum at the time of closing to avoid adding it to the loan amount. The premium is calculated as a percentage of the principal amount of the loan, and premiums can range from 0.6% to 4.5%.
The pros of mortgage default insurance are that you can buy a property for a little as 5% down, lenders often offer lower interest rates, and some lenders even have cashback programs for people with insured mortgages.
Some of the cons of default insurance are that the premiums will make monthly mortgage payments higher, purchase price limitations, and insurance is much harder to obtain when self-employed.
The three insurance companies in Canada are Canada Mortgage Housing Corporation, commonly known as CMHC, Sagen previously known as Genworth Financial Canada, and Canada Guaranty.
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