What is Private Mortgage Insurance?

In good times and bad, it never hurts to have a safety net and a little help moving in the right direction. One of the best things you could ever do before you sign on for a loan you can’t afford is to understand what private mortgage insurance is, what it does and most importantly what it will cost you in the long run. It’s not forever and you may be able to turn it into a benefit, but only when you go into the situation with your eyes wide open.

What is Private Mortgage Insurance?

Private mortgage insurance is a way to ensure that even if you fail, the bank will still come out on top. You’re basically hedging your bets against yourself, but you’ll see none of the benefit (aside from the initial ability to buy a home when you can’t afford to).

There are many different kinds of PMI, most will be 1% of the cost of your home each year. So if you buy a $400,000 home, you’ll pay $4000 in PMI a year. Divide that 1% by 12 months and you get $330 a month. Since most homes that require PMI aren’t going to be this expensive, you’ll usually see a MUCH lower payment each month. It’s important that you don’t confuse this with homeowners’ insurance; these are two very different things.

Is This Different from Homeowners Insurance?

Yes. Homeowners insurance protects the structure of your home in the event of an accident, and some policies will even cover the contents of your home as well as handle liability if you end up having an accident in your home. It always depends on the kind of insurance you’re carrying, so if you want maximum coverage you’ll want to talk to your insurance agent and figure out just what you need to do to cover all your bases.

Do You Need Both?

It depends on who you ask. Some Canada mortgage brokers will recommend that you just save up more money and avoid the private mortgage insurance altogether, while others will tell you to go ahead and take advantage of interest rates while they’re oh so low.

Either way, you will HAVE to have homeowners insurance if you really want to protect your investment. The last thing you want to do is get stuck with your financial pants down because you didn’t protect your investment. You can usually get the cost of your homeowners insurance by dividing the price of your home by 1,000 and then multiplying that number by 3.5 – most don’t pay more than $1k-$2k per year.

Do You Have to Get PMI if You Only Have 5% Down?

Yes, if you have less than 20% down you’ll almost always have to pay out private mortgage insurance. You’ll want to talk to your Canada mortgage broker, your realtor and other financial advisors before you go this route.

It’s important to remember that PMI isn’t forever – when you reach 20% equity you’ll be able to cancel your PMI and put that payment towards your mortgage. Keep on top of it and once you get there, give them a call and notify them in writing that you want to cancel the payments.

Danny Papadopoulos is an experienced agent of Mortgage Central and an avid blogger for Homebase Mortgages. HBM is a Toronto mortgage broker that provides home mortgages, mortgages for the self-employed, home equity loans and lines of credit, debt consolidation, private mortgage and second mortgage lending. You can visit their website at http://www.homebasemortgages.ca/