Mortgage Insurance: What It Is and How It Works

Mortgage Insurance

For the vast majority of people, buying a home means getting a mortgage. Most of us don’t have pockets deep enough to pay cash for a home outright. That means working with a lender. By definition, lenders take risks in loaning money to consumers. There’s always the risk that you might make some payments late, or default on the loan completely. In order to offset that risk, lenders require mortgage insurance in many instances. What is mortgage insurance and how does it work?

What Is Mortgage Insurance?

Really, the name says it all. Mortgage insurance is protection against you defaulting on the loan. It limits the risk that the lender is taking in loaning you the money for your home. In addition to mitigating the lender’s risk, mortgage insurance in Edmonton can also help you by allowing you to qualify for loan amounts that you would otherwise not be considered for.

Who Requires Mortgage Insurance?

It’s important to note that mortgage insurance isn’t needed by everyone applying for a home loan. It’s generally only required for those who cannot make a down payment of at least 20% of the home’s value. So, if you want to avoid adding extra costs to your monthly mortgage payment, the best course of action is to come up with a larger down payment, even if this means putting off buying that home for a few months, or even a year. The more you can put down, the less risk to the lender, and the less need there is for supplemental insurance. However, there are some mortgage types where insurance is required no matter what, including USDA loans and FHA loans.

Does Mortgage Insurance Increase Your Costs?

In a word, yes, mortgage insurance in Edmonton will increase the costs of your home loan. This is because the monthly insurance payment will be bundled in with your home loan payment.

Who Is the Insurer?

Your insurance payments will go to different places depending on where your home loan comes from. If you have a conventional home loan, then you’ll work with a private mortgage insurer, and your payments will go directly to them. However, if you obtain an FHA mortgage loan, then your insurance payments will go to the FHA. Note that FHA loans, while available with very low down payment requirements, carry a mandate that you have mortgage insurance, and you’ll have to pay both monthly costs and an upfront cost that’s added to your closing costs.

If you’re considering a VA loan, there is no mandatory mortgage insurance, but you will have an upfront cost associated with the VA’s guarantee of your loan. This can be factored into your monthly payments if you want, but it will increase your overall costs over time.

Does Mortgage Insurance Protect You?

To put it bluntly, no, mortgage insurance does not protect you. It does not benefit you, the consumer, in any way other than increasing your buying power. It is all about hedging the lender’s bet and reducing their risk. For you, the only outcome is qualifying for a home loan with less than 20% down, and an increase in your loan costs.

When Is Mortgage Insurance No Longer Needed?

The way mortgage insurance plays out over the life of a loan varies depending on the type of mortgage. FHA loans must maintain insurance for the duration of the loan. However, private mortgage insurance is cancelled once you pay your home loan down below 80% of the total loan value. So, you can count on your costs dropping at some point, as long as you stay in the home long enough.

As you can see, mortgage insurance in Edmonton is important to understand, and it will have a significant impact on your homeownership experience. Learn more from Dominion Lending in Edmonton at 780-466-9898.

Understanding How Your Credit Score Affects Your Mortgage Rate

Charts To Understand Credit Score

Credit and Homeownership: Understanding How Your Credit Score Affects Your Mortgage Rate

While your credit score might not determine your value as a contributing member of society, it does have a major impact on your life and how you are able to live it. If you’re contemplating making the leap into homeownership, for instance, your credit score will have a great deal to do with the interest rate you’re given on the home loan. In turn, that will affect the overall cost of your home loan. How does your credit score affect your mortgage rate, though?

The Higher the Better

Your credit score is a numerical summation of the amount of risk you pose to a lender. The higher the number, the lower your risk level. The lower the number, the riskier you are. If you’re in the mid to low span of the credit score range, you’ll find that lenders really don’t want to take a chance on you.

If you’re in the upper-mid to high credit range, lenders are happier to see you walk through their doors. However, you’ll find that it’s not just about whether or not you can get a loan in the first place, but about how much you’re going to pay for the privilege of taking out that loan.

What Mortgage Rates Really Mean

The mortgage rate is another term for the interest rate. It’s what you’re going to be charged for taking out the loan. You never repay just the amount the home costs – you always pay the lender for allowing you to borrow money. That’s the lender’s profit, and the greater the risk you pose, the more profit the lender wants to make to offset the chance that you’ll default before the loan is paid off and they’re left holding the bag.

Generally, the closer to 750, 800 or 850 (the max FICO score) you have, the better the mortgage rate you will be offered. However, understand that the individual lender is responsible for determining what score a borrower must have in order to be offered the best interest rate on their mortgage. Still, realize that a change of just a few points can make a significant difference in what you pay per month, and what you pay over the life of the loan. The difference between a mortgage rate of 5% and one at 8% is hundreds of dollars per month, and your credit score is the key to that rate.

Is Higher Always Better?

A higher credit score is always better. Well, at least until you get to a certain point. Up to about 700, your mortgage rate will decrease as the numbers increase. Even a modest jump of just 25 points can move you from a higher mortgage rate to a much lower one. However, once you pass the 700-point mark, you need to start considering other things to change your mortgage rate. These can include things like the type of loan you obtain, or your annual income amount.

How Do You Change Your Credit Score?

While your credit score will dictate what mortgage rates you’re offered, there’s good news for those with less than stellar financial histories. You can improve your score. It will take time and effort, though. Start by disputing any items on your credit history that aren’t yours, and then work on paying off outstanding debt and high credit card limits. With time and perseverance, you can boost your score.

However, remember that there’s little point in shooting for the highest score possible. Generally, a score of 700 – 750 is considered excellent, and even those with scores slightly under 700 can receive good mortgage rates.