Is Private Mortgage Insurance a Good Idea?

 

Private mortgage insurance, commonly referred to as PMI, is insurance which borrowers have to pay in case they cannot afford to pay a 20% down payment. As a borrower, it will cost $50 to $80 monthly. Mortgage insurance reimburses the lender if you default on your home loan. However, it can sometimes become a burden for the borrowers, especially if they do not proceed carefully. As it is based on a percentage of the mortgage loan, borrower is expected to pay each month, it varies depending on borrower’s credit risk and the size of his home loan.

2 Types of Private Mortgage Insurance

Private Mortgage Insurances can be classified into 2 broad categories – Borrower-paid PMI and Lender-paid PMI.

Borrower-paid Private Mortgage Insurance

This type of PMI is where the borrower has to pay insurance premium. Usually, borrower is required to purchase this insurance policy when he is unable to afford the 20% down payment on his home loan. It is also known as Traditional Mortgage Insurance.

Lender-paid Private Mortgage Insurance

The lender-paid PMI is the type where the lender pays the PMI premium cost of PMI but the borrower must bear the premium cost. Most lenders tend to add the extra expense of premium cost to the mortgage loan interest. Lender generally buys the lender-paid PMI policy for high loan-to-value mortgage.

Advantages of Private Mortgage Insurance for the Borrower

It has been established that there are risks associated with private mortgage insurances for the borrowers, which will be discussed in details in a later section. However, there are some up-sides of these insurances as well. One of the biggest reasons why borrowers choose this is because it allows the low income borrowers or borrowers who are in need for large amount of fund the opportunity to buy a home.  Even when the borrowers can pay only a small percentage of the total cost, they can but the home.

In addition to providing shelter, this also helps build equity. They are able to enjoy all benefits as homeowners.

Disadvantage of Private Mortgage Insurance and Ways to Avoid Them

While is seems like a great idea for both lenders and borrowers, there are some downsides associated with PMIs. As a borrower, you may have to pay for a longer period than expected. Some lenders may require you to maintain a PMI contract for a fixed period of time. So, even after you meet the 20% threshold, you may be obligated to continue paying for the insurance.

These insurances are hard to cancel and eliminating the monthly burden is not as easy. The lender might want you to to draft a letter requesting to cancel the PMI. Depending on the lender, the process may take a few months.

Ways to Avoid Risks of Personal Mortgage Insurance

Even though the risks are evident, more and more people are getting personal mortgage loans. They cave in to their financial needs. There are 3 main ways to avoid the risks associated with personal mortgage insurances. They are:

  • Make a down payment which is equal to minimum 20% of the home’s purchase price.
  • Rely on a piggyback mortgage
  • Get a lender-paid mortgage insurance

It is true that Private mortgage insurances are expensive. If you are not confident that you will be able to get 20% equity in the home in a few years, it is suggested to either consider a piggyback loan or give a larger down payment. piggyback loans might be riskier than traditional alternatives but they are tax deductible.  

Before making the final decision, assess both the positives and negatives of getting a Private Mortgage Insurance.

 

Canada’s Economy and its Effect to the Real Estate Market

In a weekly poll conducted by Nanos Research Group, the respondents who believe that real estate prices will increase in the next six (6) months jumped to 39.4 %. This percentage is the highest in 18 months. On the other hand, respondents who believe that will be a decrease in real estate prices declined to 16.6 % from 17.1%, the lowest since November 2015. The Bloomberg Nanos Consumer Confidence Index gauged from the weekly polls, increased to 55.9 from 55 in the week ending April 15, the highest since the first week of December. The head of Nanos Research, Nik Nanos stated that the surveys broke the perception that Canada’s job security and personal finances are sluggish.

Although the International Monetary Fund foresees that Canadian economy for 2016 and 2017 would slow down; stating the unemployment rate is expected to rise to approximately 7.3% by the end of the year, Canada’s real estate market remains strong. According to Canadian Real Estate Association (CREA), the national average sale price increase in 17%. However, if you take out West Coast and Central Canada regions, the sale price declined by 0.3%. One of the remaining strong players in real estate is in Quebec, with multi-million investments from local and foreign buyers, more than triple the 2014 value. High-quality education in this area remains to be the driving force to attract migrants and international investors. Consequently, Teranet-National Bank Composite House Price Index showed national home prices rose 0.8 per cent last month and 7 per cent from a year earlier.

The Canada’s real estate foreign market is mostly Chinese investors. In Juwai.com, a real-estate property search engine for the Chinese, the searches and inquires for Canadian properties increase to 134%. This indicates that foreign immigrants and investors remain to choose Canada for property investments despite of economic instability. Chinese investments are expected to increase for the coming years especially in Toronto. According to Juwai.com, the total value of all Canadian properties significantly increased to $14.9-billion in 2015 from $5.6-billion in 2014. Toronto earned around $7.4-billion while Vancouver’s searched properties amounted to $2.5-billion.

The national government is currently trying to figure out the recent value of foreign investments in Canada. Nonetheless, that national housing agency estimates that the new condominiums located in Toronto and Vancouver owned by Chines buyers account to about 43 percent.

In UBC forum in Vancouver, global real estate investment was debated upon. A geography professor David Ley discussed the financial and human resources impact of immigration in Canada and United States. Chinese nationals comprised about 85 to 90% among Europe and Asia immigrant-investors.

He also noted that 73% of properties bought by Chinese buyers were paid in cash. In connection to that, the average value of homes bought by a Chinese national in the United States was thrice the price of homes by their American counterparts. The Chinese buyers who mostly belong to the elite and upper-middle class, wanted to escape health risk and pollution, alongside corruption and food security issues.

In the flip side though, Calgary, Saskatoon and Edmonton are the most affected in the recent economic slowdown due to continued cheap oil prices and other trade barriers. Average home prices in Calgary fell 3.05%, while Saskatoon declined in 2.11%.

Interestingly, the Bank of Canada Governor Stephen Poloz refutes the idea that Canada’ economy for 2016-2017 is flat. He believes an increase in the local economy due to government spending.