If you are considering purchasing a house on mortgage, you’ve likely started comparing rates quoted by multiple lenders. However, apart from the mortgage rate, you may also have to get mortgage insurance. 

Here are 4 key things you should know about mortgage insurance:

• Mortgage insurance protects the lender: Contrary to popular belief, mortgage insurance exists to financially protect the lender, and not you. If you happen to default on your loan repayments, the lender will be compensated by the mortgage insurance company. Keep in mind that mortgage insurance and homeowner’s insurance are two different things. While the former protects the financial interests of the lender, the latter protects you from incurring losses in the event of damage/destruction to your home or possessions. 

• Mortgage insurance requirements: If you are wondering whether mortgage insurance is mandatory, the answer is that it depends on the size of the downpayment you make and the type of loan you avail. For instance, in the case of FHA loans, if the equity is less than 20% of the borrowed loan amount, you will need to get mortgage insurance, which will be paid monthly and upfront. On the other hand, conventional loans will only require you to take up mortgage insurance if the downpayment is less than 20%. VA and USDA loans do not require you to take mortgage insurance.

• It is possible to discontinue your mortgage insurance policy: Certain types of loans require customers to make at least a 20% downpayment to avoid taking a mortgage insurance policy. If you’ve made a lower down payment, you will initially need to have mortgage insurance. However, with time, as you keep making payments towards your mortgage, you will reach a point when you have at least 20% equity. At this point, you will no longer need mortgage insurance. You can call your lender to notify them of how much of your mortgage you’ve cleared and inquire about what will be required of you to cancel the mortgage insurance policy. 

• Look into lender-paid mortgage insurance schemes: Certain lenders offer customers a “lender-paid mortgage insurance” scheme. What this means is that if you are required to get mortgage insurance on your loan, the lender will pay the mortgage insurance premium on your behalf. In turn, the lender may charge you a slightly higher rate of interest. Typically, lenders who offer such a facility will pay a one-time lump sum amount as the premium to the mortgage insurance company. The downside of this is that you will need to pay a higher interest for the duration of the loan term. While you can cancel your mortgage insurance after you’ve reached 20% equity, you can’t lower your rate of interest unless you consider refinancing.

For more details on mortgage insurance and to what extent it will impact your ability to make mortgage payments, make sure to talk to your loan officer or mortgage broker. Make sure to also negotiate for a lower rate mortgage, since this will help you save on interest payments.