What Is a Mortgage Loan Insurance?

What Is a Mortgage Loan Insurance?

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    Published 09/12/2018 12:12 EST
    Updated 17/06/2020 16:06 EST

    Mortgage loan insurance can help you achieve your dream without having to wait until you can cover a 20% down payment. That’s right, you can buy most properties with only 5% down payment.

    Sounds too good to be true? Well sort of…

    In order to put less than 20% down, you’ll have to cover the cost of a Mortgage Loan insurance. This insurance guarantees that, should you default on your mortgage (e.g., skip mortgage payments), the lender will recover the balance of the purchase price.

    With its investment guaranteed by the Mortgage Loan Insurance, the lender takes virtually no risks in giving you money to purchase your dream property. Most lenders love Mortgage Loan Insurance for this specific reason, and are willing to offer homebuyers a lower mortgage rate because of it.

    Counterintuitive right? Someone who puts 5% down will get a better rate than someone who puts the full 20% down. That’s the effect of Mortgage Loan Insurance.

    Are All Purchases Eligible to Mortgage Loan Insurance?

    Keep in mind that some loans are not eligible for mortgage loan insurance. A rental unit, for example, can not be insured. A refinancing loan, a second mortgage, or a loan amortized over a period of more than 25 years, can not be insured.

    How Much Does Mortgage Loan Insurance Costs? And Who Pays for it?

    This insurance is calculated as a percentage of the mortgage size, and varies depending on the size of your down payment. Simply put, the lender will look at the total amount they will lend you (the purchase price minus the down-payment) and will take a percentage of the amount as insurance premium. The lower your down payment, the higher the insurance premium will be (more risk, more insurance to pay).

    Sounds complicated? Let’s break this down with an example: 

    If you buy a $400,000 property with 5% down payment ($20,000=5% x $400,000), you are left with a mortgage amount of $380,000 ($400,000-$20,000).

    To this mortgage amount, you must add the Mortgage Loan Insurance premium as your down-payment is less than 20%. From the table below, we can calculate the mortgage premium as: $380,000 x 4%=$15,200.

    Wait, do I have to pay $15,200 in insurance premium!?  😨

    This insurance premium can be added to your mortgage. This means that rather than lending you $380,000, your lender will be lending $395,200 ($380,000+$15,200). On your end, you will have to pay it back over the course of your mortgage life.

    Down paymentInsurance premium (of total loan)
    5%4.00%
    10%3.10%
    15%2.80%

    Bottom line, there is a cost to putting 5% down as opposed to 20%. Is it always better to put more down? The honest answer is that it depends… on one hand, you’ll pay insurance premiums, on the other hand, you will likely be eligible to lower mortgage rates (thus saving money on your mortgage payments).

    Every situation is unique, we encourage you to review your personal situation with our commission-free Mortgage Advisors. They will walk you through the tradeoffs you are making.

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