Low rates with mortgage insurance

Brandon Scott is a Sherwood Park based mortgage consultant and the author of a weekly column entitled Real Estate Solutions in the Sherwood Park News. This article was originally published on March 09, 2012:

Purchasing a new home can be a very exciting time. While there are a myriad of options available when it comes to financing that real estate purchase, not everyone is aware that some lenders offer better rates for clients that have mortgage insurance.

Typically, the only time someone would require mortgage loan insurance is when they are purchasing a home with a down payment of less than 20 per cent of the purchase price. However, some lenders are offering a lower rate to those willing to pay for mortgage loan insurance, even if it is not required. Let’s take a look at an example to see how this could benefit a potential home buyer.

Let’s assume a Sherwood Park couple is purchasing a home and has a down payment of 20 per cent, providing them with a $300,000 mortgage over 25 years. Since they have the 20 per cent down, they are not required to have mortgage loan insurance and the lender offered them a five-year fixed rate of 3.29 per cent. Alternatively, if they opt to pay for the mortgage loan insurance anyway, the lender will now offer them 3.09 per cent.

The question then becomes is it more cost effective to pay for the optional insurance to obtain the lower rate? To determine this, we must first know what the insurance premium will be on their new mortgage. The insurance premium is calculated as a percentage of the loan and is based on the size of your down payment.

In this example, the premium would be $3,000, which leaves us comparing a $300,000 mortgage at 3.29 per cent or a $300,000 mortgage at 3.09 per cent with the additional premium of $3,000 paid out of pocket.

I’ll save you the drawn out mathematical calculations, but the conclusion is that the lower rate provides this couple a savings of more than $5,600 over the five-year term. Even after we deduct the premium cost for the insurance, they are still ahead by more than $2,600.

It pays to be in the know and to know, as there are additional ways to save on mortgage interest.

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