Buying Your First Home
Understanding mortgage default insurance can help you plan your home purchase and avoid one of the most common mortgage misconceptions.
An Important Difference
Mortgage default insurance protects the lender, but it can still create an important opportunity for an eligible buyer.
The insurance helps protect the lender if the borrower defaults and the lender experiences a loss.
The insured structure may allow an eligible buyer to purchase with less than 20% down.
Example
Imagine you are purchasing a $600,000 home with a down payment of $60,000.
Purchase Price
$600,000 home
$600,000
Down Payment
10% of the price
$60,000
Mortgage Before Insurance
Purchase price less down payment
$540,000
Approximate Insurance Premium
Using an approximate 3.10% premium rate
$16,740
Approximate Total Mortgage
$556,740
The buyer would be borrowing more than they would with a 20% down payment, but they would not need to wait until they had saved $120,000.
The actual premium and mortgage amount would depend on the purchase, down payment, insurer, lender, and approval details.
Planning Insight
Many people assume mortgage default insurance protects them if they cannot make their mortgage payments.
In reality, it protects the lender. Knowing the difference helps you understand what you are paying for and why the insurance may be required.
Insured Mortgages
For an eligible home purchase, mortgage default insurance is generally required when the buyer has a down payment of less than 20% of the purchase price.
This is often referred to as an insured mortgage. A mortgage with a down payment of 20% or more is generally considered conventional and typically does not require mortgage default insurance.
Mortgage default insurance also has eligibility rules. For example, homes priced at $1.5 million or more are not eligible for an insured mortgage, which means a down payment of at least 20% is required.
Having the minimum down payment does not automatically guarantee approval. The borrower, property, lender, and insurer requirements must still be satisfied.
The Cost
The insurance premium is calculated as a percentage of the mortgage amount. Generally, the smaller the down payment, the higher the premium percentage.
Most buyers do not pay the entire premium out of pocket. Instead, it is commonly added to the mortgage balance and repaid along with the mortgage.
This increases the total amount borrowed, but it can also allow a buyer to purchase sooner rather than spending several more years saving a 20% down payment.
Because the premium increases the amount borrowed, it can also affect the monthly mortgage payment.
Compare mortgage paymentsDo Not Confuse These
The names sound similar, but the coverage and purpose are different.
Protects the mortgage lender if the borrower defaults and the lender experiences a loss.
May help repay some or all of the mortgage if the insured homeowner dies, depending on the policy.
Frequently Asked
Clear answers to some of the most common questions about this topic.
It protects the mortgage lender, not the homeowner.
It is generally required when the down payment is less than 20% of the purchase price for an eligible home purchase.
Usually not. The premium is commonly added to the mortgage balance and repaid over time.
Generally, yes. A down payment of at least 20% means mortgage default insurance is typically not required, provided you otherwise qualify for the mortgage.
No. Mortgage default insurance protects the lender, while mortgage life insurance is designed to provide coverage related to the homeowner.
Helpful Tool
Use the Down Payment Calculator to understand how much you may need and how your down payment can affect your mortgage.
What to Explore Next
Here are a few related answers, guides, and tools that may help you take the next step.
Mortgage Minute
Understand minimum down-payment requirements and where the 20% rule comes from.
Mortgage Minute
Plan for your down payment, closing costs, property transfer tax, and other purchase expenses.
Mortgage Guide
Understand the complete home-buying journey, from early planning and pre-approval to receiving the keys.
Personal Guidance
Mortgage default insurance can be confusing, especially when you are comparing different down-payment options. I would be happy to explain how it may apply to your purchase and how it could affect the total mortgage amount.
Need a Second Opinion?
I can help you work through the numbers and the next step.
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