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.

 

The Dirty Secret Your Life Insurance Broker Isn’t Telling You

A couple of weeks ago, I told you about the big issue with your mortgage broker. Essentially, they’re getting paid a volume bonus to funnel most of their business to one or two lenders, which makes it really difficult to believe that a broker is truly sending your loan to the lowest priced lender.

If you think the mortgage broker business is bad for doing this, then you’re not going to like what your life insurance broker is doing.

The life industry in a nutshell

The world of life insurance brokers works very much like the world of mortgage brokers.

Most life insurance agents are part of organizations called managing general agencies. The majority of agents belong to big ones which offer access to every major life insurer in Canada. In theory, this is good for customers.

Like with mortgages, the life insurance for most folks is pretty standard. The average person will get an average amount of insurance, paying about an average price to do so. In this sort of environment, how does a life insurance company get ahead?

There are several ways. Several insurers hire their own sales staffs to push their own stuff. Both Sunlife and Manulife have their own wealth management sales reps, who sell insurance, investments, mortgages, and so on. TransAmerica owns World Financial Group, which uses a pyramid sales structure to recruit more agents, who then sell insurance and mutual funds.

Most insurance companies don’t want to hire their own sales staff though. They’d rather focus on the insurance side of the business. So they deal exclusively with brokers. But how can they differentiate themselves from the competition? Why will brokers choose their products over a competitor’s?

The solution is simple. Like with mortgage brokers, life insurers give agents perks for sending most of their business to a certain insurer. But instead of cash, agents get all sorts of other perks, like exotic trips.

These trips aren’t the standard weekend jaunt down to Vegas either. Insurance execs spend lots of time planning these out, knowing that the difference between a mediocre trip and a great one can motivate a broker to send many potential new deals their way.

These trips typically include wives (or husbands), and as long as there are a couple of meetings about insurance-type things, they’re tax deductible. They’re a nice distraction from Canada’s long winters.

How to make sure you don’t pay too much

I’m not really a fan of these types of incentives, but I don’t let myself lose a lot of sleep over them.

The whole reason why these types of incentives need to exist in the first place is because the life insurance industry is so competitive. For many types of policies, the difference in premium costs between different companies is just a couple of bucks each month. There are always going to be outliers that are more expensive, but for the most part these policies are priced competitively.

The easy way to make sure you’re not getting ripped off is to get a quote online before you even go and talk to a live agent. These quotes aren’t perfect, but they should give you a decent enough place to start. If online tells you a certain policy should cost you $50 per month and an agent quotes you $75, at least get the agent to explain the big difference.

You can also ask the agent some very specific questions if you don’t like the quote. How many companies has he checked on your behalf? And just how many companies does he work with? Why did he choose one over the other?

Most agents will go a step further, and discuss some of the best quotes with you. It’s part of their customer service. Getting more than one quote is the whole reason why people go to brokers in the first place.

For the most part, your insurance agent is interested in getting you a good deal. They know if you’re satisfied, you’ll refer your friends. But just remember, your agent just might have a very large incentive to not get you the best deal that’s out there.