A few years ago, people did not lend more than 80% of the appraised value of their home for a mortgage loan. This was due to the significant increase in the default risk associated with high loan-to-value mortgages. Consequently, more individuals with a down-payment of less than 20% are less likely to finance the purchase of a home. However, private mortgage insurance or PMI has made it possible for these individuals to become homeowners.
When applying for a mortgage, the lender typically needs a down payment of up to 20% of the home’s purchase price. If a borrower can’t afford the amount, he will most likely look at the loan as a riskier investment. Also, it may require the homebuyer to take out a PMI.
In this article, we will take a look at the cost of private mortgage insurance in Toronto. More importantly, we will show you how the pricing model for private mortgage (PMI) insurance works.
What is Private Mortgage Insurance?
Private mortgage insurance (PMI) is a type of insurance policy that protects mortgage lenders against default on loans. If a borrower defaults on their house loan, it’s expected that the lender will lose about 20% of the home’s sales price.
Twenty percent is the smallest down payment you can give without having to pay mortgage insurance. If you pay 20% as down payment, it makes up for the potential loss incurred by a lender if your loan defaults.
However, if you pay less than 20% as down payment, the lender will usually need mortgage insurance. Mortgage insurance covers the extra loss margin for the lender. This way, if you default on your loan, the lender will receive a mortgage insurance check to cover its losses.
This may seem likea risky deal. However, the good thing is, mortgage insurance gives you a fast track to homeownership. Without mortgage insurance, few individuals can wait years to save up for a bigger down payment before purchasing a house.
How Mortage Insurance Works?
One of the risks lenders may experience in a mortgage is the loan-to-value (LTV) ratio. LTV divides the amount of the loan depending on the value of a home. Most mortgages with an LTV ratio greater than 80% require the borrower to have PMI. The main reason is that borrowers are more likely to default on a loan.
Typically, individuals need to pay PMI monthly as part of the overall mortgage payment to the lender. However, sometimes PMI is paid as a one-time up-front premium at closing. Moreover, PMI is not a permanent thing. This means that once a borrower pays down enough of the mortgage’s principal, PMI can be dropped.
If a borrower is up to date on their payments, the lender will terminate PMI on the date the loan balance reaches 78% of the original house value. In simpler words, when the equity reaches 22% the lender can terminate the PMI.
As an alternative, if a borrower has paid enough towards the loan’s principal amount, he can contact the lender and request to remove the PMI payment.
How Much Does Private Mortgage Insurance Cost?
The cost of Private mortgage insurance in Toronto ranges between 0.5% and 1% of the entire mortgage loan amount annually. Take note that the pricing of mortgage payments may differ. For example, you may get a 1% PMI fee for a $200,000 loan. Annually, that fee would add approximately $2,000 or $166 monthly to the cost of your mortgage.
For some people, PMI is essential when purchasing a home, particularly for first-time buyers. These new buyers may not have saved up enough funds to cover a 20% down payment. For buyers who want to own their own house, paying for the cost of mortgage insurance is worth it in the long run.
How is Mortgage Insurance Calculated?
When you compute mortgage insurance, you must calculate it as a percentage of the loan amount. For example, if your loan is $200,000, and your annual mortgage insurance is 1.0%, you must pay $2,000.
Since yearly mortgage insurance is re-calculated every year, your PMI cost will go down yearly as you pay off the loan. For FHA, VA, and USDA insurance loans, the PMI rates are pre-set. The rates are the same for every customer.
For conventional loans, mortgage insurance is calculated based on the client’s application. Conventional PMI mortgage insurance is calculated based on your credit score and down payment amount.
Paying the cost of mortgage insurance is necessary for those with less financial capacity to invest in a house. However, many homeowners have a choice to either avoid or pay for PMI premiums. In some cases, homeowners may realize a significant return on investment in home equity. Also, if an individual has paid their mortgage for several years, the appraisal cost is all that is needed to eliminate PMI premiums.
Life Insurance Direct is here for you if you are unsure of the benefits you need or the premiums that are best for you. You can speak with any one of our insurance brokers. They make for a good mortgage insurance calculator too. Call us at 1-844-922-1392 or email us via firstname.lastname@example.org.