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When it comes to purchasing a home, one of the most crucial decisions is selecting the right type of mortgage. Among the various options available, two primary categories stand out: the insured mortgage and the conventional mortgage. Both serve as means for homeownership, but they differ significantly in terms of eligibility, requirements, and risk mitigation. In this blog post, we'll dive deep into the dissimilarities between these two mortgage types to help you make an informed choice that aligns with your financial goals and circumstances.
What is an Insured Mortgage?
An insured mortgage is a type of home loan that receives backing from a mortgage default insurer. The main objective of mortgage insurance is to reduce the lender's risk in case the borrower defaults on the loan. In most cases, the borrower is required to pay an insurance premium, either as a one-time upfront cost or as part of their monthly mortgage payments.
What is a Conventional Mortgage?
On the other hand, a conventional mortgage is a home loan that does not have the backing from a mortgage default insurer. These loans are not insured or guaranteed by any external entity and are considered higher-risk for lenders compared to insured mortgages. Consequently, borrowers often need a stronger financial profile to qualify for a conventional mortgage.
What are the key differences between them?
Down Payment Requirements: One of the significant contrasts between insured and conventional mortgages lies in the down payment requirements. Insured mortgages typically offer more lenient down payment terms, making homeownership more accessible to a broader range of buyers, especially first-time homebuyers. An insured mortgage require as little as 5% of the home's purchase price as a down payment.
In contrast, conventional mortgages often demand a more substantial down payment, often 20% of the home's purchase price. Consequently, potential borrowers with limited savings might find it more challenging to qualify for a conventional mortgage.
Mortgage Insurance: One of the most crucial aspects that differentiate the two mortgage types is the requirement for mortgage insurance. As mentioned earlier, insured mortgages involve mortgage default insurance, which protects the lender in case of default. This insurance is provided by one of the 3 mortgage default insurers in Canada - Canada Mortgage and Housing Corporation (CMHC), Sagen, and Canada Guaranty.
In contrast, conventional mortgages do not require mortgage insurance if the borrower provides a down payment of 20% or more. As the lender does not have the backing of an insurer, this type of lending is slightly riskier for the them.
Interest Rates: Interest rates can vary between insured and conventional mortgages. Generally, insured mortgages may have slightly lower interest rates because the risk of default is partially mitigated by mortgage default insurance. However, the precise interest rate difference may vary based on market conditions, the borrower's creditworthiness, and other factors.
Loan Limits: Insured mortgages often have stricter limits on the maximum loan amount they can cover. These limits are determined by the insurer. On the other hand, conventional mortgages are not subject to such loan limits, allowing borrowers to secure higher loan amounts if they meet the lender's eligibility requirements.
Choosing between an insured mortgage and a conventional mortgage is a decision that should be based on your financial situation, credit profile, and long-term goals. Before making a decision, it is essential to research the specific mortgage options available in your area and consult with a qualified mortgage agent to determine which type of mortgage aligns best with your unique circumstances. Remember, understanding the differences between these mortgage types empowers you to make a well-informed choice and embark on the exciting journey of homeownership with confidence.
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