Lender’s Mortgage Insurance
May 8, 2008 Mortgage Insurance No Comments“Lenders mortgage insurance … is insurance payable to a lender … for a pool of securities that may be required when taking out a mortgage loan. It is insurance to offset losses in the case where a mortgagor is not able to repay the loan and the lender is not able to recover its costs after foreclosure and sale of the mortgaged property.”
From Wikipedia – http://en.wikipedia.org/wiki/Private_mortgage_insurance
Why does it exist?
When talking to first time home buyers it is not uncommon to hear “Why do I have to pay that insurance fee for something that I can’t even use?!” And I totally understand that feeling. It can feel like another institution with their hand in your pocket along with Lawyers, Home Inspectors etc etc.
We often come up with little platitudes about how it is a right of passage or “don’t worry you probably will only have to pay it once”. But the reality of the situation is that Lender Mortgage Insurance is key to past, current and future growth for the real estate industry that you as a new home buyer are now an active member of.
If this insurance did not exist the lenders would not/could not loan money to people with small down payments (less than 20% of the purchase price) – the risk would be too great!
Before this insurance existed the bank could not lend money to people who did not have a 25% down payment. 25% of the value of a house is a lot of money – so few people could afford it. The government of the day decided to create a crown corporation to provide insurance so people could purchase a house with less than 25% down. This increased the number of people who could afford houses and propped up the Canadian real estate market.
When less of a down payment is required more people can get approved for a mortgage and in turn purchase a house.
So as long as the people who buy these houses can make their mortgage payments then the market becomes stronger.
Next time we will discuss how the fee itself is calculated.