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Understanding Mortgage Insurance and CMHC

Do I really need mortgage insurance?

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Mortgage Insurance

A down payment serve as a form of security– so the larger your down payment, the better. If you have a greater amount of equity built up in your home, unforeseen circumstances may be more easily managed, and you’ll be less likely to default on your mortgage.

Lenders commonly group low mortgage rate shoppers that have a deposit between 5– 20 percent of the home purchase price into the “slightly higher risk” category. In order for the lender to protect against this increased risk, mortgage default insurance is required.

Best mortgage rate shoppers used to be able to secure 100 percent financing in Canada until October 2008 when the government stopped insuring zero down payment mortgages in an attempt to prevent a U.S. style housing crisis.

What is Mortgage Default Insurance?

Default Insurance, also referred to as mortgage loan insurance, offers protection to the mortgage lender. The lender generally requests this form of insurance for mortgage loans with a down payment of less than 20 %.

As of July 9, 2012, any Canadian mortgage rate requiring default insurance is capped at an amortization period of 25 years. This means 30-year mortgages are only a possibility for those placing more than 20 percent down known as a conventional mortgage.

In the event that you default on your mortgage, the lender will go through the process of collecting the outstanding amount on the loan. If the outstanding loan is still not completely paid off after selling the home, then the insurer will likely provide the difference back to the lender.

Where do I get Mortgage Default Insurance?

This type of insurance is supplied by the government organization Canadian Mortgage and Housing Corporation (CMHC), along with private insurers.

What Will it Cost Me?

When the lender insures the loan, they transfer the insurance premium to the homeowner. The premium is a percentage of the mortgage value based on your Loan-to-Value ratio (LTV). This premium may be paid in a single lump sum or it can be included in your monthly mortgage payments. To calculate your Loan-to-Value ratio, take the mortgage amount and divide it by the property value.

Advantages of Having Default Insurance

It is a win-win situation for both the lender and potential homeowner as the insurance protects the lender and the borrower. The lender is able to provide the same great mortgage products and rates to borrowers that are at a slightly higher risk of default.

Disadvantages of Having Default Insurance

Default Insurance helps make it possible for a homeowner to buy a property with a lower down payment– this indicates they have little value in their home and they will end up paying even more interest on the home loan. If the homeowner would like protection they will need to purchase additional mortgage insurance.

Using a Home Equity Loan for Debt Consolidation

Have you considered this popular alternative?

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Home Equity

The biggest debt you are going to deal with as a property owner is your mortgage. With the right approvals, you are able to borrow against the equity of your house with a home equity loan.

What is a Home Equity Loan?

This style of loan is somewhat different to a home equity line of credit (HELOC), which is a line of revolving credit with a flexible interest rate. A home equity loan is a one-time lump-sum loan. Lenders are normally worry-free when contributing to your existing low mortgage rate since they are protected by the fact that your loan is secured against your house.

A Tool for Debt Consolidation

The main benefit of a home equity loan is in its debt consolidation abilities.

How do I get a Home Equity Loan?

The best way of obtaining a home equity loan is through a Canadian mortgage rate professional.

Benefits of a Home Equity Loan

Money in your hands to settle outstanding high interest debts.
By paying off outstanding debts you are going to enhance your credit score.
The home equity loan may be spread over the lifespan of your best mortgage rate, typically as much as 25 years.
Tax deductions are readily available.

Downsides of Home Equity Loans

You will be jeopardizing your home if you do not have the means to pay the loan back.
Once you borrow against your house you lose equity or ownership in the home.
Speak to a mortgage broker today to find out if this financial product is the right choice for you.

Ways to Obtain a Mortgage When You’re Self-Employed

Own your own company? Find out how you could have a house too!

Data shows that almost 20% of all income earners in Canada are now self-employed. Today, lenders desire evidence of a steady income. Here are a couple of ways to ease the process and raise your possibilities of obtaining a low mortgage rate.

Document Every Penny

You’ll be required to record your income when preparing for a self-employed mortgage pre-approval. Stated Income/Stated Possession (SISA) mortgages are made without any sort of documents or bank records to verify income levels.

Keep Your Credit in Check

When it involves securing the very best mortgage rate, a good credit history and solid credit history rating will always work in your favour.

Bump Up Your Bank Account

A large down payment and hefty savings account can help encourage a lender that you’re much less of a liability when it comes to credit.

Consider a Joint Mortgage

The best way to enhance your opportunities of scoring the best mortgage rate is to take out a joint mortgage with a person who has a full-time job.

Talk to a Broker

Having a certified Canadian mortgage rate broker on your side could make a substantial difference for self-employed individuals.

Merely due to the fact that you’re self-employed does not mean you have to surrender your dream of being a homeowner. Contact FamilyLending.ca today to learn just how you could start climbing up the real estate ladder.

What are Blended Mortgages?

Blend your mortgage to improve your rate.

Quite a few people are wondering how to lower their current mortgage costs.

Generally, the mortgage penalties you incur to break your mortgage are set up as the greater of three months interest or the value of your Interest Rate Differential. If you’re going to break your mortgage, try and do it when your mortgage is sitting in the “sweet spot”– this is when your rate is not high enough to trigger IRD and thus you’re only required to pay the three months interest penalty.

Unfortunately, the sweet spot rarely comes at a convenient time. Also, most people will have trouble ever fitting into this scenario if their rate is over 4 %. If this is your situation, speak with your low mortgage rate planner about a blended mortgage. There are two options that most banks will offer:

Blend and Extend or Blend to Term

Under a Blend and Extend option, the bank will give you a brand new term at the current rate but ‘blend’ in your penalty to your new rate.

The Blend to Term option is the same idea but your term remains as is. For example, you would end up with the same two years left but at a lower rate with the penalty blended in.

If you are in that “sweet spot” a good Canadian mortgage broker will show you calculations on just how much you can save by breaking your best mortgage rate. If you’re subject to an IRD, a good planner will go over what blended options are available to you and take into account your time frame and overall goal to help you select the option that’s the best fit.

Bridge Financing

Bridge the gap between one mortgage and the next.

Bridge FinancingWhat happens if you find your perfect home the day after you put your current home on the market? Like many people, you probably get excited. Don’t worry! There is an answer– bridge financing.

What is Bridge Financing?

Bridge financing is short term financing that’s based on the equity you have in the home you are selling. The current home is used as collateral and the bridge loan is used to pay closing on the new home prior to selling the current home.

  • Bridge Financing: a short-term, high interest loan that “bridges” the gap between the purchase of a new home and the sale of a current or existing home, allowing a seller to purchase a new property before selling an existing property.

Equity is calculated by taking the sale price and subtracting the debts you currently owe on the home– the Canadian mortgage rate, secured line of credit (including prepayment penalties), real estate commissions, and legal fees. The net total is the basis for your bridge loan.

In 2010, homeowners borrowed $26 billion in additional equity from their homes. 15 percent of homeowners withdrew equity, averaging $30,000. (Source: CAAMP).

Generally, the interest on the best mortgage rate for this style of loan is considerably higher (1 to 3 percent above prime), and at times there is an administration fee tacked on. Be sure to ask your lender, and they might waive the fee for you.

Some bridge loans are structured to pay off the entire existing low mortgage rate at the bridge loan’s closing, while other variations of the loan add the new debt to the old debt. Bridge loans typically include six month terms.