Jane Dotson
When taking out a mortgage, you may be offered optional insurance products. These are different from mortgage loan insurance, which you are required to purchase if your down payment on your home is less than 20%. Optional mortgage insurance products are life, illness and disability insurance products that can help make mortgage payments or pay off the remainder owing on your mortgage in the event of your death, illness or injury. You don't need to purchase optional mortgage insurance to be approved for a mortgage, and your lender cannot insist that you buy it.
| Characteristics | Values |
|---|---|
| Purpose | To help make mortgage payments or pay off the remainder owing on your mortgage |
| Types | Life insurance, illness insurance, disability insurance, job loss insurance, flood insurance, water backup insurance, identity theft insurance, medical payments coverage, mortgage default insurance, mortgage protection insurance |
| Who it protects | The lender or titleholder |
| Who needs it | Borrowers who make a down payment of less than 20% |
| Who offers it | Mortgage lender, insurance company, financial institution |
| Who regulates it | Federally regulated banks |
| Cost | Premium based on the amount of the mortgage and the age of the borrower |
| Payment | Monthly or upfront cost |
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What You'll Learn
Mortgage life insurance
Term or permanent life insurance may provide better value than mortgage life insurance, as the death benefit or amount payable to your beneficiaries will not decrease over the term of the policy. Upon your death, your beneficiaries can use the insurance money to pay for the mortgage.
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Mortgage disability insurance
Despite these limitations, mortgage disability insurance may be worth considering if you are in poor health or have a high-risk job and do not qualify for regular disability insurance. It can provide financial support and allow you to focus on your health or finding a new job without the added stress of mortgage payments.
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Critical illness insurance
Optional mortgage insurance products are life, illness, and disability insurance products that can help make mortgage payments or pay off the remainder owing on a mortgage. One such product is Critical Illness Insurance, which pays out a cash sum if the policyholder is diagnosed with a critical illness or undergoes a medical procedure for one. This can include a heart attack, stroke, or life-threatening cancer.
While critical illness insurance can provide peace of mind and financial protection, it is not a necessity for everyone. Some may rely on an employment benefits package or existing funds, assets, or savings if they became critically ill. It is important to consider your individual needs and circumstances before purchasing any insurance product.
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Private mortgage insurance (PMI)
PMI is not required for all types of mortgages. It’s only required for borrowers who obtain a conventional mortgage with a down payment of less than 20%. You might consider saving up to make a 20% down payment, as when you pay 20% down, PMI is not required with a conventional loan, and you could also receive a lower interest rate.
PMI can be paid in a few different ways. Sometimes you pay for PMI with a one-time upfront premium paid at closing, which is shown on your Loan Estimate and Closing Disclosure. Sometimes you pay with both upfront and monthly premiums. The monthly premium is added to your monthly mortgage payment and is also shown on your Loan Estimate and Closing Disclosure. Lenders might offer you more than one option, so it is worth asking the loan officer to help you calculate the total costs over different timeframes.
Under certain circumstances, you can request to cancel PMI when your mortgage balance reaches 80% of your home’s value. Lenders are required to cancel it when your mortgage balance drops to 78% of your home’s original value, or once you are halfway through your loan term, whichever comes first. Federal law dictates that your mortgage lender must automatically end your PMI when your LTV ratio drops to 78%, or when you are one month past the midpoint of your loan term.
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Mortgage default insurance
The cost of mortgage default insurance is calculated as a percentage of the principal loan amount and is based on the loan-to-value ratio of the mortgage. The loan-to-value ratio is determined by dividing the principal amount by the purchase price. A larger down payment will result in a lower loan-to-value ratio and, consequently, a lower mortgage default insurance premium. For example, consider a home purchased for $495,000 with a 5% down payment of $24,750. In this case, the mortgage amount would be $470,250. With a 5% down payment, the purchase premium would be 4%, resulting in a mortgage default insurance premium of $18,810. On the other hand, if the same property had a 15% down payment of $74,250, the loan amount would be $420,750, and the purchase premium would be 1.7%, resulting in a mortgage default insurance premium of $7,152.58.
It is important to note that mortgage default insurance does not protect the borrower; instead, it safeguards the lender's interests. If a borrower defaults on their mortgage, the mortgage default insurer will cover any shortfall after the lender forecloses on the property and sells it. This insurance ensures that the lender is compensated for the cost of legal proceedings and any outstanding balance on the mortgage.
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Frequently asked questions
Optional insurance on a mortgage is a type of credit and loan insurance that you are usually offered when you take out or renew a mortgage. It is not a requirement to be approved for a mortgage and you must give your express consent to obtain this product.
Examples of optional insurance on a mortgage include Scotia Mortgage Protection insurance, which offers four coverage options: life, critical illness, disability, or job loss coverage.
Mortgage insurance, also known as mortgage default insurance, is mandatory if you want to buy a residential property with a down payment of less than 20% of the purchase price. This type of insurance protects the lender in the event that the borrower defaults on their loan.
Critical illness protection can pay off the remaining mortgage balance (up to a certain amount) if you are diagnosed with a covered critical illness, such as a heart attack or stroke.
Disability protection can maintain your mortgage payments up to a certain amount per month for a period of time if you are unable to work due to an injury or impairment.
