Making Sense of PMI and How to Avoid It

Are you planning to buy a home, but not sure about the additional expense called Private Mortgage Insurance (PMI)? PMI is an added cost that comes with some mortgages which can be a big obstacle for potential homeowners. In this blog, we're going to take a closer look at PMI and explain everything you need to know. We'll also show you how SmartHomeLoan.ca can help you make informed decisions when it comes to your mortgage financing.

What Is PMI?

PMI stands for Private Mortgage Insurance, an insurance policy that protects lenders in case of default payments by borrowers. This insurance policy kicks in when someone borrows more than 80% of the value of their home's worth. The purpose of PMI is to protect lenders from losses due to unpaid mortgages. Lenders make it mandatory for borrowers who don't put down at least 20% toward a down payment on their homes.

Now, let’s break it down into costs: lender-paid mortgage insurance (LPMI) or borrower-paid private mortgage insurance (BPMI). With BPMI, the borrower pays all the fees associated with obtaining PMI as part of their monthly mortgage payments. On average, this type of insurance ranges anywhere from 0.3%-1% per annum calculated based on the total loan amount taken by the borrower.

LPMI involves paying for a one-time fee upfront or adding up your annualized premium with interest rates added to your monthly mortgage payments until it hits about 80%, where premiums end automatically.

Why Do Lenders Require PMI?

The primary reason that lenders require PMI is to mitigate financial risks as lending large amounts isn't without its own risks. By requiring borrowers to pay private mortgage insurance premiums, lenders create an extra layer of protection against defaults and foreclosures.

It's essential to understand that homes are valued based on what they sell for in open markets, meaning their prices tend to rise and fall. During market downturns, home prices may plummet, which increases the chances of borrowers defaulting on loans. When defaults occur, lenders would like to recover as much money as possible. PMI coverage provides an essential layer of protection that makes it easier for borrowers who need a bit more financial help.

How SmartHomeLoan.ca Can Help

PMI doesn't have to be a headache or barrier for homeownership with SmartHomeLoan.ca's guidance. As registered mortgage agents with the Financial Services Regulatory Authority (FSRA), we can help you understand how PMI works and whether it's necessary in your case.

Our experts have helped people from all walks of life obtain mortgages with various costs – including PMI fees. Our primary goal is to alleviate concerns about down payments and mortgages so individuals can buy homes without worry.

How to Avoid PMI?

While PMI is necessary for some borrowers to obtain a mortgage, there are ways around it. In this next section of the blog post, we'll share tips on how you can avoid paying private mortgage insurance premiums.

Make A Larger Down Payment at Closing:

There's one simple solution if you're looking to avoid private mortgage insurance: make a higher down payment towards the purchase price of your home upfront. Paying 20% or more as your down payment eliminates the requirement for Private Mortgage Insurance entirely.

Consider Lender-Paid Mortgage Insurance:

Lender-paid mortgage insurance (LPMI) could be an option if you don't want borrower-paid private insurance or pay monthly payments indefinitely. LPMI involves paying for a one-time premium that covers the cost in its entirety over time instead of smaller payments made each month along with interest rates added underneath due balances associated with your principal loan amount.

Use Piggyback Financing or A Second Mortgage:

Another way someone might avoid paying private mortgage insurance is via piggy-back financing whereby they take out two separate loans simultaneously. The second mortgage is a subordinate lien position, meaning that if the borrower defaults, the first mortgage has priority over payments. The borrower can obtain a smaller down payment due to taking both loans simultaneously, which also allows them to avoid private mortgage insurance fees altogether.

Real Estate Investing & PMI

While Private Mortgage Insurance's primary use-case is for owner-occupied homes or first time home buyers with less than 20% down payment amounts, it is still relevant for real estate investors. By investing in properties that generate income as an investment strategy, homeowners can then use that revenue stream to cover the 20% down payment cost of their primary residence outright.

Investing in property provides an additional revenue stream needed, which means they'll be able to pay for various costs associated with owning property and mortgages without having to worry about continually shelling out cash in every area possible.

Conclusion

In conclusion, private mortgage insurance can be costly and should be avoided if possible. Hopefully we've provided you enough information on how it works and why lenders require it plus tips on avoiding this extra cost while navigating the sometimes overwhelming world of getting a home loan.. Remember SmartHomeLoan.ca is always here offering guidance to make informed decisions regarding your financial future. We're just one phone call or click away!