What is mortgage insurance and when is it required?
Mortgage Insurance Explained — Do You Really Need It and When Is It Required?
What mortgage insurance is (simple)
Mortgage insurance protects the lender, not you. If you default, the insurer pays the lender the loss. It lets buyers get into a home with less than a 20% down payment.
When mortgage insurance is required
- Canada: If your down payment is less than 20% of the purchase price you must buy mortgage default insurance (CMHC, Sagen or Canada Guaranty) for most insured, conventional mortgages.
- United States: Conventional loans usually require private mortgage insurance (PMI) when LTV (loan-to-value) is over 80%. FHA loans carry mortgage insurance premiums (MIP) even with lower down payments.
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Types of mortgage insurance — short and clear
- Mortgage default insurance (Canada): Required for high-ratio mortgages (under 20% down). Paid to CMHC/Sagen/Canada Guaranty.
- Private mortgage insurance (PMI) (US): Lenders require it on conventional loans over 80% LTV.
- FHA mortgage insurance (US): Mortgage insurance premiums may apply regardless of down payment amount on FHA loans.
- Mortgage life/credit insurance: Optional. Pays your mortgage if you die or are disabled. Different product; protects you or your family, not the lender.
How premiums work (actionable)
- Premium = percentage of mortgage amount. In Canada the mortgage default insurance premium is added to your mortgage or paid upfront and varies by LTV and provider. In the U.S. PMI can be canceled once you reach 20% equity (varies by loan type).
- Action: Ask your broker for the exact premium table for your LTV. Don’t guess.
How to avoid or reduce mortgage insurance
- Save 20%+ down and avoid it entirely.
- Split purchase (partners) to increase down payment.
- Consider a guarantor (some lenders accept a family guarantor to avoid insurance).
- Shop lenders — premium structures and rules differ.
Quick, practical checklist before you sign
- Confirm whether your mortgage requires mortgage insurance.
- Get the exact premium rate and whether it’s added to your mortgage.
- Ask when insurance can be removed (if applicable).
- Compare lenders and insurance providers.
FAQs
Q: Does mortgage insurance protect me?
A: No — it protects the lender. Only mortgage life or critical illness insurance protects you.
Q: Can mortgage insurance be cancelled?
A: In many US conventional loans yes, when equity reaches 20%. In Canada default insurance stays if the mortgage remains insured; removal often requires refinancing with 20%+ equity.
Q: How much does mortgage insurance cost?
A: It varies by loan-to-value, property type and insurer. Typical default insurance ranges and structures differ by country—get a written quote.
Bottom line
Mortgage insurance is common, predictable, and avoidable with a 20% down payment. If you need a high-ratio mortgage, know the premium, who it protects, and how it’s paid. Make decisions with numbers, not hearsay.
If you want a clear, no-nonsense review of your mortgage options, contact Tony Sousa — local expert in financing and mortgages: tony@sousasells.ca | 416-477-2620 | https://www.sousasells.ca
