When you look at a mortgage contract, the technical terms can feel overwhelming. Not all mortgages are the same, and small details buried in the fine print can make a huge difference. With Mortgage Connection, you can find clarity on these details and feel secure about your financial future.
A key part of understanding your mortgage is knowing how the terms affect you. The main difference between an insured and uninsured mortgage comes down to your down payment size and who pays for default insurance. Knowing which one applies to you is the first step toward a clearer path to homeownership.
The Basics of an Insured Mortgage
You may hear an insured mortgage called a high-ratio mortgage. This is the type of loan you get when your down payment is less than 20% of the home’s purchase price. This insurance protects the lender—not you—if you are unable to make your mortgage payments.
What Are the Rules for an Insured Mortgage?
To qualify for an insured mortgage, you typically need to meet a few conditions related to your down payment and other factors. These often include:
- Your down payment is between 5% and 19.99%.
- The purchase price is less than $1.5 million for a first-time homebuyer.
- The maximum amortization period is 30 years for a first-time homebuyer.
- You need to live in the property as your primary home.
How Does Mortgage Default Insurance Work?
As the borrower, you pay for this insurance. The cost is a one-time premium that gets added to your total mortgage amount and paid off over time with your regular payments. The size of the premium depends on your down payment—the smaller your down payment, the higher the insurance premium will be.
A Look at Uninsured Mortgages
An uninsured mortgage is often called a conventional mortgage. You get this type of loan when you can make a down payment of 20% or more. Because you have more equity in the home from the start, the lender does not require default insurance.
When Is a Mortgage Uninsured?
Your mortgage is generally considered uninsured in several situations, such as when:
- You put at least 20% down on a home under $1.5 million.
- You buy an investment or rental property.
- You choose a loan term longer than 25 years.
- You refinance your existing mortgage.
Key Differences for Borrowers
With an uninsured mortgage, you completely avoid paying the mortgage default insurance premium. This can save you thousands of dollars. However, the interest rates for these mortgages can sometimes be a little higher than rates for insured loans.
What About “Insurable” Mortgages?
A third category, the insurable mortgage, fits between insured and uninsured. This option applies when you make a down payment of 20% or more, but the loan still meets most of the rules for an insured mortgage.
The Main Features of an Insurable Mortgage
For your mortgage to be considered insurable, it usually needs to meet these criteria:
- Your down payment is 20% or more.
- The purchase price is under $1 million.
- The amortization period is 25 years or less.
Who Pays for the Insurance & How It Affects Your Rate
In this scenario, the lender may choose to purchase insurance on the loan for their own protection, and you do not pay the premium. Because this makes the loan less risky for the lender, you may be offered a lower interest rate than you would with a fully uninsured mortgage.
How Your Mortgage Type Affects Interest Rates
The kind of mortgage you have plays a big part in the interest rate a lender offers you. Because insured mortgages are lower risk for lenders, they often come with lower interest rates. An uninsured mortgage, on the other hand, may have a slightly higher rate to balance the lender’s risk.
Does a Lower Rate Always Save You Money?
A lower interest rate sounds great, but it doesn’t always mean you save money overall—in fact, the lowest mortgage rate isn’t always the best choice. With an insured mortgage, you have to pay the insurance premium, which can add thousands to your loan. It’s important to look at the total cost over time, not just the interest rate.
Can You Get a Good Rate with an Uninsured Mortgage?
Yes, it’s possible. Lenders may offer competitive rates on uninsured mortgages, especially if you have a significant amount of equity in your home. For example, if your loan is only 65% or less of your home’s value, you could qualify for a lower rate.
Common Questions About Mortgage Insurance
Navigating the world of mortgages can feel complicated, but you don’t have to do it alone. Here are answers to a few common questions that come up when you’re exploring your options.
Is an Insured or Uninsured Mortgage Better?
There isn’t a single “better” choice—it all depends on your financial situation. If you can save a 20% down payment, you avoid the extra cost of the insurance premium. If not, an insured mortgage can help you buy a home sooner, even with the added cost.
What Happens to the Insurance When You Renew?
If you paid for mortgage default insurance when you first bought your home, that coverage stays with the mortgage for its entire life. This means you can switch lenders when you renew your mortgage and still benefit from the original insurance policy without having to requalify.
How Can You Choose the Right Option?
Comparing the long-term costs of each mortgage type is key to making a decision you feel good about. The right choice depends entirely on your finances and homeownership goals. Working with experienced mortgage brokers can help you see a clear comparison to make a fully informed decision.
Straightforward Mortgage Advice
Navigating your mortgage options is much simpler when you have clear information. Our team at Mortgage Connection is passionate about helping you understand every detail, so you can move forward with a clear plan. Reach out today to discuss your homeownership goals.
