Now that you're married, you've become part of that population class. You're now also thinking of becoming a homeowner yourself.
As a young family, this likely means you have to take out a mortgage. It's the same for the majority of Canadians who rely on these loans to finance their home purchase.
The thing is, mortgage rates aren't the only rates you need to consider. Private mortgage insurance rates may also play a part in your life as a borrower.
Not familiar with the term? Don't worry.
This post will help you better understand what this "insurance" is all about. Keep reading so you can figure out if it'll help you become a homeowner!
Did you know that in Canada, mortgage applicants need to pass this thing called "stress test?" It lets lenders figure out if they can handle a huge increase in their mortgage rates. It gives lenders an idea on their applicants' risk profile.
As a first-time borrower, that likely surprised you, didn't it? But you may also have thought it's only for borrowers who have poor credit scores. Or those who can't put at least a 20% down payment on the home they'd like to buy.
Unfortunately, that isn't the case. New lending laws say anyone getting a new mortgage or renewing/refinancing may have to take the test.
That can make securing your first home loan even harder than it already is!
But look at it this way. "Testing" yourself can help you figure out if you can handle a sudden rise in your mortgage rate. It gives you a clearer picture of how prepared you are for home ownership.
Once you've decided (and proven) you are, then it's time to look at your financial ability to make a down payment. This'll also help you understand how private mortgage insurance (PMI) may benefit you.
Your down payment determines your need for PMI. Down payment is the upfront lump sum you pay the home seller to secure the property's purchase. The keyword here is "lump sum", which means a huge chunk of cash.
For instance, the home you want to buy has a selling price of $500,000. The down payment you need to make can be anywhere from 5% upward of that price. In Canada, 5% is the legal minimum down payment for homes that cost $500,000 or less.
The amount of money you then put down on the house gets deducted from its selling price. From there, your mortgage loan covers the remaining "unpaid" price of the property.
So, let's say you're willing to make a down payment of at least 10%. That means you'll shell out $50,000. Your mortgage amount would then need to be $450,000.
Quite easy, right? But the Math doesn't end there.
If you'll make a down payment of less than 20%, you also need to buy mortgage insurance. You'll pay a premium for it every month, on top of your mortgage payments.
You're not the one "covered" or "insured" even if you're the one buying private mortgage insurance. It protects the lender, in case you default on your mortgage. Seeing as there's quite a lot of money involved in your loan, PMI acts as a "security" for the lender.
That isn't exactly music to the ears, is it? But PMI isn't as bad as you think.
For starters, it lets home buyers become home owners. Especially those who don't have enough money set aside for a 20% down payment. In fact, half of homeowners aged 35 and younger now have a home, thanks to PMI.
Think of it this way.
Would you lend $450,000 to someone without some form of "collateral" or security? You most likely won't, since that's a huge chunk of money that you may not even get back.
It's the same for lenders, but they take on more risk, since they lend to millions of Canadians.
That depends on who you ask. If you ask the government or lenders, they'll tell you that you do, if you have less than 20% down payment. But, if you have enough to put down 20% or even more, then no, you don't need it.
So, the truth is, it still depends on you. If you rather not spend more towards your mortgage, then prepare yourself to put down no less than 20%. You can choose to put off your purchase while saving more to avoid "needing" to buy PMI.
If you want to take advantage of low house prices or low mortgage rates ASAP though, then PMI may be helpful. This is especially true if you want to start building a family soon. That way, you and your kids can experience the joys of home ownership together.
There are various types of mortgage insurance, although the most common are BPMI and LPMI. BPMI stands for "borrower-paid mortgage insurance". LPMI means "lender-paid mortgage insurance".
The main difference between the two is who does the actual paying. But at the end of the day, you still make the payments.
With BPMI, the premiums you pay for the insurance get added to your mortgage payments. So, you pay monthly for the insurance, plus the monthly you pay towards your mortgage.
Whereas LPMI gets included in your mortgage rate. The lender "pays" for the insurance, but in exchange of charging you a higher mortgage rate. In some cases, this type of PMI can help you save, so be sure to compare your options!
Although less common, you may also encounter the single-premium and split-premium PMIs. You can check out this guide we have for a more comprehensive review of each of your PMI options.
So, how much is mortgage insurance? Again, this depends on how much your down payment will be. At the moment though, expect rates to be anywhere from 2.8% to 4%.
The 2.8% rate applies to down payments of at least 15% to 19.99%. A 3.1% rate is for down payments of 10% to 14.99%. If you'll put down only between 5% and 9.99%, expect your PMI rate to be at 4%.
Here are sample computations based on a $500,000 home selling price for you to get a better idea.
Let's say you can put down 15% on a house selling for $500,000. That means you have at least $75K to saved up. This'll qualify you for a 2.8% PMI rate.
So, your mortgage will only have to cover the remaining $425K ($500K - $75K). Now, apply the 2.8% rate on the mortgage amount ($425K * 0.028).
This means your mortgage insurance premiums will total to $11,900. Add this to your mortgage amount ($11.9K + $425K). Your total mortgage payments, including mortgage insurance premiums, will be $436,900.
What if you can only make a $60K down payment? That represents a 12% down payment. That'll put you within the 3.1% PMI rate.
Here's how to compute your total mortgage payments, including mortgage insurance premiums:
First, subtract $60K (your down payment) from $500K (the home's selling price). So, your mortgage amount will be $440K.
Now, multiply $440K by the 3.1%. Your mortgage insurance premiums will total $13,640. As such, your total mortgage payments would then amount to $453,640.
If you only have $25K saved up for a down payment, then that's 5% of $500K. You'll have a PMI rate of 4% in this case. Here's how to compute your mortgage insurance payments:
Again, deduct your down payment from the home's selling price first ($500K - $25K). Your mortgage amount needs to be $475K to cover the entire price of the house. $475K * 0.04 (4% rate) equals $19K.
In total, your mortgage payments with PMI will be $494K.
All these computations show you how a bigger down payment reduces PMI-related costs. That should tell you that saving up more can be worth it, especially since PMI isn't actually for you. The bigger the down payment, the lower the private mortgage insurance rates.
But again, it all depends on whether you can wait or if you want to take advantage of current lower housing prices. The bottom line is, if you want to buy a home now and have less than 20% to put down, PMI may be a good option.