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.
