If you’re planning on buying a home, and are like most Canadians, you probably will fall shy of the 20% down payment to obtain a conventional loan. Therefore, you’ll need private mortgage insurance (PMI). Now, some of you may look at “private mortgage insurance” and think that’s a good thing, but it’s not; at least, not for you. Why? Well, when you hear the word “insurance,” you probably think of something that you pay for and that protects you. However, when it comes to private mortgage insurance (PMI), that thought is only partially correct; as a homebuyer with a non-conventional mortgage, you will need to pay private mortgage insurance but the PMI but the insurance is not for your benefit; it’s for the benefit (and protection) of your mortgage lender. Do not misunderstand. PMI does have its merits but if you can avoid paying PMI, try. Here are the three top reasons why:

DOWNER #1: No Benefit For The Family:
With a life insurance policy, if something happens to you, your family reaps the benefits of the monies you’ve paid into the policy. However, that’s not the case with PMI. If something happens and you’re not able to make mortgage payments, your family gets nothing from the private mortgage insurance company; no grace period and no payout of monies paid into the PMI. What’s more is that, if your family is unable to keep up with the mortgage (and PMI) payments, you / they will lose the home.

DOWNER #2: It’s Like Being Tethered To A Ball & Chain:
PMI isn’t something that you can just stop making payments on when you don’t want the service anymore; if you have to pay PMI, then it’s a requirement of your mortgage. As such, terms are always set to determine when PMI will no longer be required. Some mortgage lenders will agree to allow PMI to cease once you have a specific amount of equity in the home (20%+ typically) while others will require that PMI payments be made for a specified amount of time, regardless of the amount of equity in the home. Additionally, once you’ve satisfied the PMI-related terms of your mortgage, you’ll still have to cut through your lender’s PMI company’s red tape in order to cancel the PMI. Translation: You can’t de-shackle yourself from PMI until your lender / PMI company releases you.

DOWNER #3: The Opportunity Cost Is High:
A home is an investment but the money you spend paying PMI is just that, a payment. It is not an investment. However, if you are able to obtain a loan without paying PMI, the same money you would’ve spent on the PMI could be used to invest in something on which you could earn interest or some other financial return. For comparison’s sake, presume that a mortgage you were interested in required a $1,500 annual PMI payment. Well, that payment would simply be money spent once it was paid. Conversely, if you saved that same $1,500 over one year and then invested it in a mutual fund, you could actually use that money to earn more money. That sounds much better than just making a payment, doesn’t it?

With that said, it’s important to note that having PMI is not necessarily bad; it’s just not preferred. After all, the reality is that many Canadians cannot afford the 20% down payment required to obtain a conventional mortgage. Paying PMI makes it possible for Canadians who would not otherwise be able to own to become homeowners. And in the end, if homeownership is the goal, then owning a home and paying a mortgage with PMI is better not owning at all.

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Mauricio Navarro is the writer and adviser to MortgageRatesInCanada.ca – a comparison website for Canadian mortgage rates. Also, Mauricio is involved as an investor in CompareMortgageQuotes.ca – a website to compare mortgages & receive instant mortgage quotes.

Private mortgage insurance or PMI as is known is a form of insurance new homeowners are required to purchase. This is particularly so if their down payment is 20 percent or less of the property’s valued price or sale price. The main reason for private mortgage insurance is to protect lenders in the case the new homeowner defaults on their home loan.

Although private mortgage insurance has a bad reputation since it only protects lenders, it is actually a good thing. Reason is it has allowed millions of people to be able to buy homes with smaller down payments. Previously, these people would not have been able to afford a home had the down payment remain the same. Another important reason is private mortgage insurance can help you qualify for home loans.

Cost of Private Mortgage Insurance

The cost actually varies depending on the mortgage loan and the monthly down payment. Usually, it is half a percent. To calculate your private mortgage insurance, you can use this estimated formula:

Annual private mortgage insurance = 100 – (percentage of down payment paid) * (sale price of house) * 0.05

Let’s take an example. Suppose you brought a $500,000 house. You pay a 20 per cent down payment. So using the formula as above:

Annual private mortgage insurance = (100 – 20) * $500000 * 0.005 = $2000

Your monthly mortgage insurance will be around $167.

One important point to note is you should always keep track of your payments and notify your lender when you have reached 80 percent equity of your house. Even though the Homeowner Protection Act requires lenders to notify you of how long it will take you to pay, it is still better to keep track of it yourself.

There are some cases where lenders make homeowners continue their private mortgage insurance all the way through the lifetime of the loan. This usually applies to high risk borrowers. Therefore your payment history and credit rating such as your FICO score plays an important part as well.

Some people hate paying private mortgage insurance for years. There are some ways around it.

One way is to pay more interest on your home loan. Some lenders will waive the private mortgage insurance requirement if you agree to pay a higher interest rate. Since mortgage interest is tax deductible, it can be a good idea to go ahead.

Another way to avoid paying private mortgage insurance is to prove to the lender that the value of your home has risen. If the value of your home has risen significantly, your home have already have the 20 percent or more equity you need to cancel the mortgage insurance. However, it does take time for the lender to verify your claim, sometimes as long as a year.

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Genworth Mortgage Insurance Spokesman Terry Souer speaks with Cathleen Jeffrey regarding South Shore communities on their distress list.

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Dan Lim works in a finance company specialising in home loans consulting. Get more information, tools and resources on home loans, visit his site: http://about-homeloan.com

Article Source: ArticlesBase.com – What Is Private Mortgage Insurance?