For most people, buying a house is one of the most exciting times in their lives.
One of the most ingrained parts of our financial culture is home ownership. Not only has it been a decent store of wealth over the last few years, but we have an emotional connection to our houses. Little Timmy took his first steps right over there. And then little Susie pushed him over because she was jealous. Ah, such memories.
Homeowners have all sorts of advantages compared to renters. They have the ability to borrow large sums of money using just real estate as collateral. Once they get some equity in the house, they can then access that equity at a cheap interest rate. Homeowners don’t pay any taxes on gains in the property’s value, either.
There are advantages to being a renter too. Renters are more mobile, which is a plus in 2016. It costs a lot of money to sell residential real estate using traditional means, although that is coming down. And renters get to avoid property taxes, expensive house insurance, and upkeep, all things the average homeowner discounts when calculating gains from their principal residence.
But on the whole, arguing for home ownership will always be better than arguing against it, mostly because of a truth many don’t realize. Renting appeals to someone’s logical side. Home ownership appeals to their emotional side. Eventually, our emotions win out. So we buy a house.
Don’t discount the emotion of owning a house. People get very attached to a place they don’t even own, an attachment that can lead to some really dumb moves. And I’m not just talking about the time I put sriracha sauce and jalapenos on my sub. My mouth is still burning.
The biggest mistake homeowners make is falling in love with a house.
Smart Realtors know this and they exploit it nicely. “Hey, I know you said you only wanted to pay $300,000, but I found you this really nice house for only $320,000. What’s the harm in looking?”
The next thing a buyer knows they’ve completely scrapped their budget. Especially when Realtors say things like “go ahead. Money is cheap.”
Another big mistake new home owners make is when it comes time to shop for a mortgage.
They start out well, browsing the various rate comparison websites for the best rates. Or they might shop around the old fashioned way by picking up the phone and calling banks and brokers.
“Calling people? Oh, the humanity!” — millennials.
But then their well-laid plans start to come unraveled. In their haste to get a mortgage, sometimes new home owners settle for less. Their mortgage broker might not be able to get them a 2.49% mortgage, so they blindly accept 2.69%. The extra 0.2% ends up costing thousands in extra interest over a 25 year loan.
And finally, we come to one of the biggest mistakes of all. Choosing the wrong mortgage life insurance.
Bad mortgage life insurance
As a former mortgage broker, I know the story all too well.
After securing a mortgage for the borrowers, the agent then begins the pitch for mortgage life insurance. They can be protected for just $25 per month, or $30, or whatever. It’s an easy sell because it’s cheap, easy, and the broker has successfully tapped their emotions. Nobody wants to leave a spouse with a huge mortgage debt.
And best of all for the broker, they get a nice commission for selling it. Not as nice as the commission for selling the mortgage, but it’s still a nice bit of cream at the end of a transaction.
But this kind of mortgage life insurance is a real crummy deal for the customer. Premiums stay the same even though the mortgage balance is going down. It’s one insurance company offering the product, so they have no assurance the price offered is competitive (spoiler alert: it’s usually not great). And buying an insurance product from a mortgage broker or banker isn’t generally a good idea. They’re not insurance people.
Probably the worst part about those kinds of mortgage life insurance products is something called post-claim underwriting. Yes, those are fancy words that only make sense to insurance people. What they mean is the insurer waits until you die before seeing whether the stuff put in the application form was true or not.
Here’s how it works in layman’s terms. When you get one of those policies, you answer a few health questions. Once you die, the insurance company starts to verify the validity of these questions. If the insurer finds something they don’t like, this could mean your claim is more denied than that one time I tried to date the popular girl. And her hot friend. And her kinda goofy looking friend.
Instead of buying crummy mortgage life insurance, people should buy term life insurance with a payout large enough to cover their entire mortgage balance.
The difference between the two products is very important. A term life insurance policy will have a consistent payout value for the length of the term, rather than going down with the value of the mortgage.
Since term insurance coverage is agreed to by both parties before you start paying premiums, it’s a solid contract. As long as you continue to pay, you’re covered. There’s no nasty surprises when you’re worm food.
And finally, Canada Mortgage Insurance deals with all sorts of insurers, rather than just one. This translates into much lower prices which can really add up over the life of a mortgage. A decrease of just $20 per month translates into a $6,000 savings over the life of a 25 year mortgage. And remember, that’s not for equivalent insurance. That’s for better insurance.
There are two ways to go about getting mortgage life insurance. The bad way is taking the insurance offered by your bank or broker. The better way is using an insurance broker to get a much better–and usually cheaper–term life insurance product. Even if you have crummy insurance in place today, it’s not too late to switch.