Exactly. What you had envisioned is life insurance, pure and simple. It’s designed to pay off the mortgage and leave the house in the hands of the family.
Paying for such insurance through the bank is a losing proposition, depending on how it’s written - unless the premium varies by the outstanding loan value (i.e. it’s less when you’ve paid off 40K than it was when you took out the mortigage). You’re better off with a regular life insurance policy, payable to your beneficiaries, which is worth enough to pay off the mortgage.
PMI / Private Mortgage Insurance is a whole other thing and it is explicitly designed to protect the lender, not the borrower.
For a while there, people were getting out of paying PMI by taking out things like 80-10-10 loans (where they have a primary mortgage for 80% of the cost, a secondary mortgage for 10% of the cost, and at the typical higher rate we see with second mortgages), and putting 10% of their own cash down. Or some variant of the same e.g. 80-15-5. Since the primary was 80%, they had no PMI. If the value of the house increased sufficiently, they could later refinance, roll the second into the primary mortgage, and pay off the rest at the lower primary-mortgage rate.
Which worked fine as long as housing prices were stable and hopefully increased.
I seem to recall that those second mortgages were often shorter term, or balloon types, or variable, or whatever. They certainly weren’t as favorable as the primary mortgage and there was a good incentive to get rid of them when possible.
I worked once in a small mining town; business in mining is very cyclical. The bank lady told me that if it were not for mortgage insurance, banks would require a down payment of 25% to 50% in those high-risk one-industry towns. So in a way, it made it possible for Joe Schmoe to get a house in the sticks for the same terms as the guy in the big city.
CMHC is a government corporation, so their mission is to break even and grease the skids for home ownership, rather than skin everybody for the benefit of the executives, and oh yeah, the other shareholders.
It enables you to buy a house more easily, and also enables the next guy to buy your house too. (“Grease the skids”) If everyone who wanted to buy had to have 30% down, the number of buyers (and prices) would be small. When you can buy on the same terms as the big city, a lot more people buy homes. During down times, in a union environment, they lay off the guys with the least seniority. So if you bought early in the cycle, odds are you were safe when the bad times come along.
Actually, until about 1985, CMHC would take over any home that the owner walked away from with no penalty. That backfired in the early 80’s when interest rates went to about 18% breifly, and they ended up with 1/4 of the houses in the town. Plus, the bank lady told me some people walked away from their houses simply because they were paying more than the houses were worth in the depressed market, evenn though they could afford to pay.
Today, you still owe the balance to CMHC if the bank forecloses, unless you really are bankrupt. So you cannot walk away.
Small note: Unlike the USA, mortgage interest is not tax deductible in Canada. As a result, there is more incentive to pay off the house rather than continuously remortgaging to full value. This fact saved the Canadian market from a lot of the meltdown, foreclosure and empty house problems that hit the USA recently. OTOH, you pay no tax on the profit from sale of your primary dwelling.
AFAIK, this is not correct. PMI provides NO protection to the borrower whatsoever. If the PMI company pays a claim to the bank to cover a borrower’s deficiency in the event of a foreclosure, the PMI company then has the right to sue the borrower to recover whatever it paid.
Only if they’re below a certain threshold of profit, and there are more complications as well regarding how long you’ve lived there.
Most simply: if a married couple profits more than 500,000 dollars on the sale of a house, the amount over 500,000 is taxable as a capital gain. Single person if it’s over 250,000. Of course, the VAST majority of such sales don’t yield anything like that amount of profit.
Used to be the entire gain was taxable unless you immediately repurchased another house (there were some age-based exclusions). Then you could delay counting that profit until you sold the next house, etc.
The current approach is simpler in general. Though there are assorted criteria (like you had to have lived in the house for 2 of the past 5 years, if you moved for a job that could be prorated, etc.).
That’s not strictly true - you are allowed a capital gains exemption (up to a certain amount) on the primary residence so long as you meet other criterion.
It’s usually better to buy than to rent, but not in every case, and usually not right away. It usually takes at least a few years for buying to become a better deal than renting. That’s because there are some big up-front costs with buying, and your monthly payments from buying are generally higher. However, those payments are building equity in your home – you’re “keeping” some of what you’re paying. Also, while you’re making your payments, your home generally appreciates in value. After some number of years the equity you’ve paid into your home plus the appreciation will overcome the extra money you had to pay to get into the home.
Not if you’re living in a town with one component to the economy, which is cyclical and results in extreme fluctuations in property values, and probably great changes in unemployment rates that lead banks to refuse to issue mortgages unless they get 50% l-t-v ratio or a third party to bear their risk. the banks in this situation can see the writing on the wall - there is a very good reason why they won’t issue normal mortgages here, which should illuminate serious problems for the home buyer from an equity building standpoint.
but thanks for the forbes.com introduction to buying-versus-renting 101.
i suggest looking at the context of this thread when answering a post about “what’s so bad about renting”
there’s was no little need for your pedantic lecturing about equity building as if you were actually answering my question
There are public reasons for encouraging homeownership. In general, people prefer that their neighbors be homeowners rather than renters (regardless of their individual rent or buy decision), because it leads to communities with more stability and respect for property. Obviously, we just got to see the dark side of homeownership at any cost in the housing bubble. Still, that doesn’t mean there are no legitimate reasons to promote homeownership.
The whole idea that homeownership promotes better neighborhoods proved to be another urban legend. Yes, it was true that neighborhoods in the U.S. with lots of rentals were usually less desirable and not as well maintained, but that’s because people who rent tend to be poorer and either didn’t have the money needed to help maintain the property or pay enough to a landlord to make it worth maintaining the property.
In Europe and in cities like New York, there are many places where the upper classes rent, and I wouldn’t mind having one of these apartment complexes in my neighborhood. What we found out about the last housing boom is that homeownership didn’t translate into property maintenance. People who couldn’t afford their mortgage simply failed to maintain their homes – especially when they were under threat of foreclosure.
Of course, the boom-and-bust small town economics translates also to the rental market. If you can’t afford to buy a home, likely your landlord can’t afford to buy a home or have it sit empty have the time. The net result is a loss of investment, fewer housing units, and tighter housing market with more radical price fluctuations due to shortages during the good times.
Of course there were a few guys (staff, non-union) who made their millions because they still had jobs during a nasty strike in the 60’s. some bought up a dozen or more houses and rented them out. When things got really good and they wanted to retire, houses bought for $10,000 in 1964 sold for $100,000 or more in the 90’s. Plus the rent paid off the mortgage before that.
Promoting home ownership enhancs community stability, reduces transient workers (usually!!). Making it easier for the banks to finance these transactions benefits bank, buyer and seller alike.
