Why You Can Trust Bankrate
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. Weve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.
Bankrate follows a strict editorial policy, so you can trust that were putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.
Our mortgage reporters and editors focus on the points consumers care about most the latest rates, the best lenders, navigating the homebuying process, refinancing your mortgage and more so you can feel confident when you make decisions as a homebuyer and a homeowner.
What Is Mortgage Insurance And How Does It Work
Mortgage insurance lowers the risk to the lender of making a loan to you, so you can qualify for a loan that you might not otherwise be able to get.
Typically, borrowers making a down payment of less than 20 percent of the purchase price of the home will need to pay for mortgage insurance. Mortgage insurance also is typically required on FHA and USDA loans. Mortgage insurance lowers the risk to the lender of making a loan to you, so you can qualify for a loan that you might not otherwise be able to get. But, it increases the cost of your loan. If you are required to pay mortgage insurance, it will be included in your total monthly payment that you make to your lender, your costs at closing, or both.
What Is Mortgage Insurance
Although home ownership is a common goal for many Canadians, few people are able to buy their homes outright. Instead, they contribute a percentage of the purchase price and borrow the rest. The portion contributed is called the down payment, and the loan for the remainder of the purchase price usually comes from a mortgage, which is a type of loan secured against the home.
If your down payment is less than 20% of a homes purchase price, you need mortgage loan insurance, also referred to as mortgage insurance or mortgage default insurance. Lenders require this insurance because a lower down payment means your mortgage is for a higher ratio of your homes value, and lenders consider borrowers with high ratio mortgages as having a higher risk of default or non-payment.
Recommended Reading: Usaa Boat Loan Credit Score
Riders And Other Benefits Of Home Loan Insurance
Many providers of home loan protection plans offer home loan insurance policies with optional rider plans for enhancing the cover benefits. There are several other aspects like critical or terminal illness, unemployment, accidental death, disability, etc. that would be integrated with the home loan insurance plans.
Home loan insurance is certainly not compulsory while you opt to avail a home loan. However, it secures your assets and finances. This insurance is very crucial for safeguarding your interests in unforeseen circumstances. As an insurance policy buyer, you should keep in mind that you need to conduct your own research before availing any of the various available options.
You have the option of purchasing your home loan insurance either from the home loan lender or from any other portal that sells insurance policies. Having a home loan protection plan surely gives you the desired assurance and keeps you safe from unforeseen circumstances.
Types Of Home Insurance Policies
Insurance companies offer a range of home insurance policies with different levels of coverage against various risks and causes of damage.
Home insurance policies vary from one company to another. Its a good idea to shop around to get the best insurance for your needs.
A comprehensive policy provides the most coverage. It covers all risks to your home and contents except for any risks named in your policy as exclusions. Also referred to as a special or all-perils policy.
For example, say your comprehensive policy names flooding, sewer backup and earthquake as exclusions. This means you dont have coverage for these named risks. However, your home and contents are covered for all other risks that arent named, such as fire.
A standard policy provides less coverage than a comprehensive policy. It only covers the risks to your home and contents that are named in your policy. Also referred to as a basic or named perils policy.
For example, say your standard policy names fire. This means youre covered for the risk of fire damage. However, your standard policy doesnt name flooding, sewer backup and earthquake which means you arent covered for these risks.
A broad policy provides a level of coverage in between comprehensive and standard policies. Also referred to as a broad-form policy.
For your home itself, a broad policy covers all risks except for any risks named in your policy as exclusions. This is similar to comprehensive policies.
Recommended Reading: Co-applicant In Home Loan
Settling A Claim If You Have A Mortgage
If you have a mortgage, your home insurance policy will usually include a loss payee clause. A loss payee clause makes your mortgage lender your beneficiary. In case of loss or damage to your home, your insurance company will pay your lender up to the remaining balance of your mortgage when you submit a claim.
When you make a claim, your insurance company may, at their discretion, give the money to either:
- you, so you can fix your home when you submit a claim
- your lender, who would then give you the money for repairs or replacement after you submit receipts proving they were done
Pmi For Conventional Mortgages
Many lenders offer conventional mortgages with low down payment requirements some as low as 3%. A lender likely will require you to pay for private mortgage insurance, or PMI, if your down payment is less than 20%.
Before buying a home, you can use a PMI calculator to estimate the cost of PMI, which will vary according to the size of your home loan, credit score and other factors. Typically, the monthly PMI premium is included in your mortgage payment. You can ask to cancel PMI after you have over 20% equity in your home.
» MORE:Calculate your PMI costs
Also Check: Usaa Auto Loan Approval Odds
What Is Homeowners Insurance
Homeowners insurance, also called home insurance, covers your home, its contents, and more. You pay an annual premium for the coverage, and the insurance company pays for covered losses up to your policys limits. For example, if a fire damages your home, your homeowners policy can help repair it and pay to replace damaged items such as your rugs and furniture. Most standard home insurance includes six coverages:
- Personal liability
- Medical payments to others
Homeowners insurance isnt required by law. However, if you take out a mortgage, the lender will require you to buy a policy and maintain coverage until you pay off the loan. Many lenders require you to pay your home insurance through an escrow account.
Protection For The Home You And Your Family Love
Buying a home is a tremendous achievement. Itâs also one of the biggest financial commitments youâll ever make, which is why itâs important to make sure you or your family will be able to continue to make your mortgage payments in the event of death, disability or a critical illness.
Your Home, Your Lifestyle
When you chose your home, you chose a neighbourhood to live in and schools to send your kids to.
â¦you chose a lifestyle for your family,
â¦and there is a way to help protect it.
Right now, your finances and mortgage add up nicely.
But what if you got sick or hurt, and were suddenly unable to work?
That means any additional income is preserved to take care of your other expenses.
You canât predict the future, but you can help to ensure that once youâre in your new home, youâll stay there, with a protected mortgage balance from RBC.
HomeProtector insurance is an optional creditorâs group insurance program, underwritten by The Canada Life Assurance Company, and is subject to terms, conditions, exclusions and eligibility restrictions. Benefit maximums: life coverageâthe outstanding balance of your mortgage to a maximum of $750,000, disability coverageâyour regular mortgage payment to a maximum of $3,000 monthly for up to 24 months, critical illness coverageâthe outstanding balance of your mortgage to a maximum of $300,000.
Read Also: Usaa Auto Lease Calculator
Difference Between Home Loan Insurance & Home Insurance
People generally get confused between home insurance and home loan insurance. These two terms are absolutely different and serve dissimilar purposes.
Under home insurance, your insurance covers your home against risks that includes:
- Damage of home/property due to theft.
- Damage from natural calamities like earthquake, storm, flood, fire, etc.
This means home insurance is the insurance that cover the replacement cost of your home in case of a damage. While home loan insurance cover the loan you take for buying the property. This plan covers only the outstanding loan liability from the time it is brought.
Most of the lenders have made home insurance mandatory. Whereas, home loan insurance is not mandatory and it depends on the sole discretion of the loan applicant or the borrower.
Also Read: Term Insurance Vs. Home Loan Insurance
Pros And Cons Of Mortgage Insurance
While mortgage insurance primarily benefits the lender, it does serve a purpose for the borrower because it allows you to get a mortgage with limited down payment savings. Putting down 20 percent can be challenging, especially with home values on the rise, so by paying for mortgage insurance, you can still get a loan without needing a large down payment.
Waiting until you have a 20 percent down payment also runs the risk of missing out on favorable mortgage rates. Mortgage insurance offers the ability to get those rates now, meaning you can save on interest over time, despite borrowing more money with a smaller down payment at first.
However, there are downsides to mortgage insurance, as well, mainly that its an extra expense you wouldnt otherwise have to pay, and that it can be difficult to get out of if you have an FHA loan.
Recommended Reading: 84 Month Auto Loan Usaa
Is Home Loan Insurance Necessary
It is a common practice nowadays that most financial institutions offer home loan insurance bundled with the home loan. It is important to note here that no insurance regulation has made it mandatory to purchase home loan insurance along with a home loan. However, it is in your interest only to purchase it so that you dont have to worry about losing your investment and loan repayment in the event of a mishap. A home loan applicant must do due diligence before finalizing a home loan protection plan. It is not necessary that you buy it from your lender only. You have the freedom to choose any home loan insurance plan. You can compare plans and choose the one that best suits you.
Points To Consider While Buying Home Loan Insurance
Coverage: Most home loan insurance plans have diminishing coverage. The coverage size is determined by the amount owed on the mortgage. As a result, when a person repays a loan, the amount insured decreases. However, in the case of term insurance, the coverage remains the same. In term plans, the principal amount is received by the nominee, who can then make the loan payments to the lender or bank. If you have a house loan insurance plan, the insurer pays the lender immediately for the outstanding home loan to settle the loan.
Provider: A general insurance company or even a life insurance company might provide you with home loan insurance. The ones provided by general or public insurance providers must be renewed annually. Life insurance policies are typically for a more extended period.Read: Planning To Buy a House? Check The IIFL Home Loan Eligibility Here
Terms of loan and insurance: The loan term and the insurance coverage duration must be the same. It is not good to choose a shorter cover duration to extend it later. Theres a reasonable risk youll forget to extend your contract in the long term. Furthermore, it gets increasingly harder to obtain adequate coverage as you become older. Even if you do acquire one, it will be somewhat costly.
Salient Features of Home Loan Insurance Policy
Home Loan Insurance BenefitsRead: DHFL Home Loan Interest Rate 2022 Check Eligibility and Best Offers
Recommended Reading: Car Refinance Usaa
Why Is Housing Loan Insurance Important
A housing loan insurance policy covers the loan amount in case of failures of home loan repayment by you. Thus it is beneficial for both the lender and the borrower.
- Importance of Home Loan Insurance for Lenders – Home loan insurance policy is important for lenders. Banks and NBFCs earn a lot through home loan interest rates and they dont want to lose their money when you are unable to pay. Failure on your part, hampers the lender’s regular sources of income. Thus, home loan insurance is ideal for lenders, because in any case, banks receive the expected funds.
- Importance of Home Loan Insurance for Borrowers – Home Loan insurance is important for you because it ensures that in case of failure of repayment of the loan, the insurer will pay back the loan on your behalf. In that case, the home loan won’t create a burden in times of financial crisis over your family members in your absence. Note that, a home loan is a secured loan which gives the lender a right to acquire the pledged property incase of inability to pay the loan. However, with home loan insurance, you wont lose the ownership of the house, even when you fail to repay it.
Pros Of Mortgage Insurance
Mortgage insurance offers several benefits to aspiring homeowners.
Firstly, it helps you buy a home sooner. Since the average Canadian income hasnt kept pace with real estate prices, it may take years to save for a 20% down payment. Mortgage loan insurance lets you buy a home with as little as 5% down so you can stop paying rent and start building home equity as a homeowner sooner.
Mortgage loan insurance also adds stability to slow economic times, because it helps ensure mortgage funds are available to home buyers. It lowers the risk of lending, and helps borrowers buy homes they wouldnt qualify for otherwise.
In addition, it also helps ensure borrowers get a competitive interest rate on their mortgages. High-ratio mortgages often get better rates than uninsured mortgages.
Don’t Miss: Fha Refinance Mortgage Insurance
Difference Between Housing Loan Insurance And Home Insurance
Home loan insurance is different from home insurance. The following table lists out the differences between the two.
|Home Loan Insurance||Home Insurance|
Home loan insurance can be bought only when you have an ongoing home loan or is applying for a new housing loan.
Regular home insurance can be bought anytime as long as you own a house.
Home loan insurance lasts until the end of the loan tenure.
Home insurance ends when the opted tenure ends. It can be opted for up to 30 years.
A home loan insurance helps you repay your loan amount in case of his or her inability to do so.
Home insurance provides coverage to your house if any damage occurs like that of thefts, fire, floods, burglaries, etc.
Examples of home loan insurance: HDFC Life Home Loan Protection Plan, SBI Life Saral Shield, etc.
Examples of Home insurance: HDFC Ergo, Bajaj Allianz, SBI Long Term Home Insurance Policy, etc.
How Much Does Mortgage Insurance Cost
Mortgage insurance isnt free. Your lender pays a mortgage insurance fee or premium calculated as a percentage of the total mortgage amount. In most cases, your lender adds the cost of the mortgage insurance premium to your mortgage amount.
The percentage decreases depending on the down payment amount:
For example, if you put 5% down on a $400,000 home youd need a mortgage of $380,000, or 95% of the purchase price. The CMHC mortgage premium would be 4% of the mortgage amount, or $15,200. This amount could get added onto your mortgage, bringing your total mortgage amount to $395,200.
Read Also: Avant/refinance/apply
Actual Cash Value Vs Replacement Cost
As you compare policies and providers, you’ll come across terms about reimbursement. The two most common terms are replacement cost and actual cash value. These terms refer to two popular methods insurance companies use to value insured property:
- Replacement cost coverage: A policy with this coverage enables you to replace your damaged property with similar materials and quality. You receive the full replacement cost if a covered item is damaged or stolen. Depreciation isn’t factored into this coverage.
- Actual cash value: Actual cash value is calculated by taking the replacement cost and subtracting the depreciation. Policies that have an actual cash value payout usually cost less to purchase. But the amount you receive for reimbursement may not be enough to replace damaged possessions.
A replacement cost policy may seem the most appealing at first. However, the higher potential payout means you’ll pay more for your policy. Carefully consider all costs, and what your budget allows, before choosing a policy.
When Should I Take Out Insurance
As a general rule of thumb, it is a good idea to review your insurance needs as soon as you purchase an asset or have a change in circumstances .
When it comes to taking out insurance, it is important that you do not delay the process. The sooner you insure yourself, your family and your assets, the quicker you can rest easy in the knowledge that you are protected should unforeseen circumstances arise.
Also Check: Can You Use A Va Loan For Investment Property
Top 6 Reasons Why You Need Home Loan Insurance
A home loan is a long-term financial responsibility that a borrower is required to repay within the loan period. In case the borrower is unable to repay EMIs due to unforeseen circumstances such as death, accident, or job loss, home loan insurance comes into the picture. Simply put, home loan insurance or mortgage insurance covers the borrower and ensures home loan repayment. Note that it is different from home insurance, which protects your home against any unforeseen event. Home loan insurance makes sure that your loan is repaid even in your absence.