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Determining your Default Insurance

Determining your Default Insurance

Mortgage statistic paperwrok with pen and a calculator

When you borrow money towards the purchase of a home, a mortgage broker or lender will most likely require default insurance. This insurance acts as a sort of safety net for the broker and lender, should anything go sour in the agreement. It is not an uncommon cost, but the amount and how it’s paid does vary from case to case. Let’s take a look at what default insurance is, why it’s needed and how to determine its cost.

What is Default Insurance?

Default insurance, commonly referred to as Mortgage Insurance or CMHC loan insurance, is basically just that. It is an insurance policy on your loan. However, the insurance is for your lender, not you. Essentially, when you borrow money from a lender for your mortgage, an additional cost is added to ensure you live up to your end of the deal. This would be known as default insurance. This insurance policy protects the lender in the case that the borrower reneges on their payments of their mortgage, leaving the lender high and dry. While typically those using an insurance plan would cover the expense of it, the premium cost is actually given to the borrower to pay, for the lender’s use.

How Much Is it?

Typically, the amount of the default insurance premium is determined by the total amount borrowed and your total down payment. While mortgage default insurance is required on home purchases with less than a 20% down payment, there is some wiggle room in the total premium cost. First, let’s take a look at how to calculate which premium percentage you’d fall into.

Let’s say you bought a house for a hypothetical $474,000 and saved $40,000 to put towards the down payment.

$474,000 (home price) – $40,000 (down payment) = $434,000 (mortgage amount)

You would then determine what percentage of the purchase price your down payment covered, which will give us your premium percentage.

$40,000 ÷ $474,000 = 8.44% (premium percentage)

With this premium percentage, you will fall into a category, based on its amount, from your lender. Typically, your lender will have chart showing which category you fall into, based on current market rates. In our hypothetical case, let’s say this borrower qualifies for an insurance premium of 2.75% because of their premium percentage. This would make their total amount of default insurance $11,935 over the course of their entire amortization period, bringing their entire mortgage to a grand total of $446,935. The amount of $11,935 is 2.75% of the $434,000 that you’re borrowing from your lender. This amount gets added onto the mortgage amount of $434,000 making the actual cost of your mortgage $446,935.

How Do I Pay it?

Default mortgage insurance is paid gradually, with payments added into your mortgage payment each month. When examining your mortgage options in terms of the frequency of your payments and your mortgage insurance premiums, it’s important to discuss your cash flow and financial options with your mortgage broker to decide on a feasible amount you that can pay each month, which will then get added into each mortgage payment.

If you have any questions about your mortgage default insurance and how to calculate its cost, feel free to give me a call at 705-315-0516. I am always happy to help you better understand your mortgage costs and to assist you in determining the best financing option for you and your family.

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