What is Mortgage Default Insurance? What You Need to Know
When a home buyer purchases their home, they need to have a down payment. Ideally that down payment equals 20% of the home’s total cost, but home buyers can sometimes pay as little as 5%. While a 5% down payment makes homeownership more accessible to a larger number of people, it can also make lenders nervous because they think the buyer may not be able to repay their loan. Because of this, buyers who pay less than 20% down will have to pay lenders mortgage insurance fees, also known as LMI or CMHC. Here is everything home buyers need to know about LMI.
How Much Does LMI Cost?
A lot of buyers may be intimidated by LMI because it’s an additional fee that needs to be paid on top of their normal monthly mortgage. The monthly cost of LMI will depend on a few different factors such as who the buyer is borrowing their money from and what percentage they put down on the home. Typically, LMI will be 2.8-4% of the monthly mortgage payment total. A buyer who puts down a lower down payment will also have higher LMI payments than someone who puts down more. Someone who puts down 8% may have to pay 3.6% LMI, while someone who put down 18% may only have to pay 2.8%.
In addition to this, the home buyer will also have to pay a one-time premium. The cost of this premium will again change depending on various criteria, but it will range from .6-4.5%. This premium can be paid up front, but it doesn’t have to be. Getting it paid off quickly will help decrease interests rates, however.
How is LMI Paid?
It’s understandable for buyers to be concerned about paying for LMI because it sounds like yet another payment they have to juggle. Fortunately, it’s more simple than that. The total LMI cost is calculated at the beginning of the purchase and added to the total cost of the home. After that, the LMI payment is automatically added to each mortgage payment, so it’s impossible for a buyer to forget it. And because the payment information is available from the very beginning, buyers know exactly how much money is going toward LMI and how much they need to save in order to pay for it.
Unfortunately, buyers who would rather pay the lump sum so they don’t have to worry about it later will be unable to do this. There is currently only one way to pay off LMI, and that is through payments made via the home buyer’s mortgage.
Can LMI Costs Be Reduced?
Paying for LMI during every single mortgage payment can be a pain, even if it’s only a small percentage, and home buyers will want to know how they can cut down on these costs. Unfortunately, there is currently only one way for homeowners to reduce their LMI costs, and that is by increasing the down payment on the home. Homeowners who want to reduce their LMI costs as much as possible should try to do everything in their power to have a 20% down payment, otherwise they will have to pay some form of LMI throughout the duration of their mortgage.
Paying for lenders mortgage insurance can seem confusing at first, but it’s actually quite straightforward. Understanding LMI before buying an East Calgary home is a great way for home buyers to learn how to avoid it and what they can do to make their money go as far as possible.