When you take out a private mortgage in Toronto to purchase a new home, most private lenders will require that you put down at least a twenty percent down payment on the price of the home. This limits their risk and brings down the overall cost of the loan. The problem is that a twenty percent down payment can add up to $50,000 or more in some cases and many people just don’t have access to that kind of cash. If this is your situation, you can likely still get the loan, but the lender may require that you take out a personal mortgage insurance (PMI) policy to minimize the risk of default. If you are willing to do this, you can often reduce the amount of the down payment to 5% or even less.
Despite the name, these policies do not protect you in the case of a default, but rather ensure that the bank gets at least a portion of its money back if you default. The responsibility of paying the premiums will fall on your shoulders. A few banks offer programs to make it easier to take out one of these policies and some banks even offer their policies.
If you pay your mortgage on time, the insurance continues to accumulate and everyone is happy. If for whatever reason you can no longer pay the loan and the bank is forced to foreclose, the insurance will pay the bank an additional 15% or more added to the home’s value. The bank uses these additional funds to cover the costs associated with reselling the home.
PMI can add a substantial amount to the monthly mortgage payment. If at all possible, you want to avoid this unnecessary expense. Either try to save enough to make a 20% down payment or try to find a bank that doesn’t require PMI. Unfortunately, neither of these things is easy to do.
Occasionally you can avoid having to take out PMI by securing a second loan to use as a down payment. This second loan can be in the form of a personal loan that doesn’t require PMI. You will then be able to put down a 20% payment on the home purchase, meeting the bank’s requirements. This strategy may not work in all cases since it will raise your debt to income-ratio and make it harder to qualify for the mortgage.
Another option is to secure the mortgage through one of the federal government programs. Programs offered through the VA and FHA among others often do not require either a large down payment or PMI. For many people, it is this factor that makes such loans the best choice.
If you are required to take out PMI, you will be able to cancel it at a certain point in the life of the loan. Once you owe less than 80% of the home’s current assessed value, you can apply to cancel the insurance. Once dropped, your monthly payments will drop and you will feel like you have come into free money. These savings can be used to get ahead in your payments and hedge against future problems.