There is often much to worry about when purchasing a home for the first time. After all, every buyer wants to pick the right neighbourhood, pay the mortgage rate at the lowest price possible, and get in touch with a property that meets all your needs and expectations.
However, saving adequate funds for a sizeable deposit may hinder Canadians from getting the house of their dream. This is where the private mortgage insurance (PMI) comes in to assist you in getting a mortgage you could not qualify for.
So, what is private mortgage insurance in Canada? Moreover, what should you consider when looking for one?
Find out more about it and more in this article.
Meaning of Private Mortgage Insurance
PMI stands for Private Mortgage Insurance, a type of insurance coverage that lenders need if they notice that the loan borrower does not meet the down payment set by the Housing Finance Policy.
So, in case you have not accumulated enough cash to make the standard 20% down payment as per the Housing Finance Policy Center, then you need the assistance of PMI.
Private mortgage insurance will assist the buyer in purchasing a without having to wait until the full 20 percent down payment is raised. However, you will still need to consider a few things when finding private mortgage insurance, such as those covered in this article.
Importance of Private Insurance Mortgage
In a real sense, mortgage insurance is not meant to protect the buyer but to protect the lender from massive loss of finances instead, especially if the buyer fails to repay the mortgage. PMI fills the gap of covering the loss if the property goes into foreclosure or a short sale auction.
PMI also comes when the buyers will not afford the 20% down payment set or want to draw off their savings for other homeownership bills. In such circumstances, lenders may still chip in and offer them a conventional mortgage provided they take out PMI.
The lenders make all these arrangements, and the private insurance firms do the issuing. According to recent statistics, most Canadian residents acquire homes by paying a certain percentage of the home buying price. The remaining portion is usually borrowed from mortgage lenders as conventional loans.
However, since private insurance companies do the issuing, there is a need to find the right and reliable insurer in the market. With that said, if you reside in Canada and its environs, you need not hesitate to call Insurance Direct Canada brokers to help you secure the conventional loan with ease.
Determination of Private Mortgage Insurance Cost
PMI costs vary depending on a specific lender and the money put down the mortgage plan. The cost variations usually are influenced by some factors such as mortgage size, loan-to-value ratio, down payment, and credit score.
PMI is usually expressed as a percentage of the total mortgage, ranging between 0.58 and 1.86 percent. So, the higher the mortgage, the more is the PMI and vice versa.
The client loan-to-value (LTV) is another factor that influences the PMI cost. This represents the mortgage when compared to the total value of the property.
A higher LTV is obtained through borrowing less and increasing the down payment, and vice versa. In this case, a lower LTV typically poses a higher risk for the lenders, which is why the PMI cost increases as the LTV decreases.
Your credit score is also another factor that significantly influences the PMI cost. If your credit score is higher, the fewer are the risks to the lenders. That’s why it’s often easier to qualify for a lower PMI if your credit score is excellent.
Likewise, buyers with good credit scores are also subjected to lower PMI premiums than buyers with lower scores. Other aspects which influence the PMI cost include:
- Fixed or adjustable interest rate
- Coverage amount
- The period for the loan term
Private Mortgage Insurance Payment Options
The PMI payment options differ from one particular lender to another. Some lenders have different payments options, while others set a fixed policy. In a nutshell, most clients pay for the PMI payments in two popular ways.
The first one is the annual lump sum payment called the single-payment mortgage insurance. Meanwhile, the second one is a monthly payment referred to as borrower-paid mortgage insurance.
Single-Payment Mortgage Insurance
After the loan closes, the payment is made in one fell swoop for the single premium mortgage. Since you’re paying upfront, this will reduce the entire monthly payment.
Of course, this type of payment is a bit tricky if you are cash-trapped. Moreover, the lump sum payment may be disadvantageous for clients who want to refinance or sell their property as it is non-refundable.
Borrower-Paid Mortgage Insurance
Meanwhile, the borrower-paid mortgage insurance as the second option is usually subjected to your monthly mortgage payments, making the expenditures more palatable.
In this case, the hybrid payment usually integrates the two options. The client partially makes the payment, and the remaining amount is subjected to the monthly mortgage expenses.
After the lenders settle on the PMI payments, you need to inquire about the different payment options.
Moreover, it’s best to ensure the lender offers you a cost breakdown for every possibility to help you make a well-informed decision regarding the most cost-effective choice that fits your budget.
How to Get Rid of Private Mortgage Insurance
Luckily, there are proven ways to eliminate PMI if you need to pay it now.
- First and foremost is to make payment consistently until you get to 20 percent equity in your property or attain 80 percent LTV. This is the point at which you will need to contact the lender to cancel the PMI upon verifying that you have indeed qualified.
- Another circumstance in which you can get rid of the PMI is when the home value has increased, and the client has more than 20 percent equity. This is when the LTV reaches the 80 percent mark, and you can request for home value reappraisal and cancel the PMI.
- The third situation is when the client’s cash flow rises unexpectedly and paying the mortgage becomes faster. You can make additional payments towards the mortgage, raising the LTV more quickly, thereby cancelling the PMI.
When purchasing a property, it’s best to inquire with your lender regarding the process of how they deal with mortgage insurance and the PMI payment options to avoid encountering any inconveniences.
With that said, Insurance Direct Canada is your reliable insurance broker if you want to pick the best and cost-effective payment option. Visit their site for any queries, as well as mortgage-related quotes and advice.