You've just gotten married; congratulations! But what if your "happily ever after" gets dragged down by things beyond your control?
It may sound like it would never happen to you. However, homeowners know the grim truth: there's always the possibility of something going unexpectedly wrong.
Private mortgage insurance can protect you from these situations, but many people don't know how it works.
Keep reading to discover our newlywed's complete guide to private mortgage insurance!
When you're looking at buying a house, you'll see the term "PMI" thrown around quite a bit. This term simply represents "private mortgage insurance."
There are many different kinds of PMI, and different factors when it comes to calculating your cost. Keep reading to learn more about what PMI is and exactly how it works.
When you think about "insurance," you're probably thinking about something that protects you and your investments. However, PMI is a little different: it is primarily designed to protect the lender's investment in the house.
Think of it this way: your lender knows better than anyone that someone might default on their home loan (like with the housing crisis a few years ago), so PMI is designed to protect them when an investment is risky.
How do they define "risky?" In most cases, you will have to pay PMI if you have put anything less than 20% down on your home when you buy it.
Sometimes newlyweds resent having to pay PMI. After all, this makes your mortgage that much more expensive.
However, it's healthy to think of it the other way: most newlyweds cannot afford to pay for a fifth of their dream home right upfront. PMI allows you to put less money down and buy a home sooner than you otherwise would.
It's important to know what the different kinds of PMI are and how they work.
Borrower-paid PMI is the most typical kind of private mortgage insurance. If the type of PMI isn't specifically named, chances are that this is what it is.
As the name implies, the borrower continuously pays this PMI. The amount is added to their monthly mortgage payment.
The good news is that this PMI can eventually be canceled. Once you have paid off 20% or more of your home, you can request the lender to cancel this ongoing PMI.
Some lenders may require you to pay off 22% before canceling, in the event of the home depreciating in value.
At first glance, "lender-paid PMI" sounds pretty good. That means the bank or other lender is paying for it, right?
Well...yes and no. The lender will technically pay the PMI, but they won't do it for free: they will charge you a higher interest rate on the loan, so in this sense, you are still paying for the PMI.
There are pros and cons to this kind of PMI. The main pro is that you might still end up paying less each month than you would with a traditional PMI. The main con is that this kind of PMI can never be canceled: refinancing will be your only real option.
Another kind of PMI is the single-premium PMI. With this kind of insurance, you actually pay the PMI amount in a lump sum or finance it directly into the mortgage.
If you have the money, this is a great option because your monthly payments will be lower and you won't have to worry about refinancing down the line.
However, this option may not be worth it if you have to use financing to pay the PMI.
This is because you'll effectively be paying for that premium over the lifetime of the mortgage. And those who move often should beware: if you sell the home (or simply refinance it) in the first few years, you won't be seeing any of the money for this PMI go back into your pocket.
If borrower-paid PMI is the most common type, then split-premium PMI is the opposite: it's the least common PMI of them all. It's kind of a hybrid of the borrower-paid and single-premium PMIs.
Under this system, you pay for some (but not all) of the PMI upfront. The rest is paid monthly, like with borrower-paid PMI.
It is possible with this PMI to request PMI cancellation, and at the lender's discretion, you may receive some or all of the split premium payments as a refund.
Earlier, we mentioned the ability to have the bank or lender cancel your PMI. While not every PMI allows you to do this (review the different PMI types above), there are a few extra steps you need to take for cancellation.
First, the cancellation request must be made in writing: it is not enough to simply call your lender. And the lender will want to see that you have a solid payment history and that there are no liens on your home.
You may be required to get a new appraisal on the value of your home. This helps to determine that you have paid off at least 20% of the overall value.
There is another kind of PMI that you cannot cancel, and that is the one attached to the FHA loan.
Many newlyweds are tempted to buy a home with an FHA loan, which is designed to help people buying their first home. These loans are easier to get and require less money down.
There's a "catch," though: rather than a traditional PMI, FHA loans come with a special kind of insurance premium that you must pay each month.
It is impossible to cancel this premium, and the only option is to refinance the loan (ideally after you have paid off at least 20% of your home).
Now you know how important private mortgage insurance can be. But do you know where to find the best insurance providers in Canada or even North America?
At Insurdinary, we are devoted to making insurance extraordinary. To see what we can do to give you and your spouse a "happily ever after," contact us today!