Tag Archives: home buying

Budgeting, Real Estate, Saving

Save $10,000 by avoiding Private Mortgage Insurance

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“A simple fact that is hard to learn is that the time to save money is when you have some.” —Joe Moore

Saving money is the cornerstone to building wealth.

Granted you have to have some to actually save some of it.

Regardless, the time to save is when you have it.

An ever better way to save money is to avoid doling it out in the first place. If you can slash or cut out expenses entirely, you can accumulate more wealth faster.

Buying a home is one of the reasons why people save money because buying one is expensive.

If you read my post, Home Buying:  Survival of the Fittest Wallet; then you understand what I mean about home buying.

Home Buying: Survival of the fittest wallet

Every dollar that you do not have to send out ultimately stays in your wallet.

A great way to save on money you spend on your home is to eliminate the cost of mortgage insurance, which is known as PMI.

What Is PMI?

Private mortgage insurance is something lenders use to protect their investment in your home. Until you own it or have put down a reasonable down payment, the bank wants to protect its property by making you pay insurance on it.

Most lenders require PMI if a homebuyer does not make a down payment of 20% of the home’s purchase price – or, in mortgage-speak, the mortgage’s loan-to-value (LTV). This LTV ratio is in excess of 80% (the higher the LTV ratio, the higher the risk profile of the mortgage).

Meaning if you owe anywhere above 80% of the home’s value, then you are considered risky and are a candidate for PMI.

For example, if you purchase a home for $250,000 and are unable to put down 20% ($250,000 x .20 = $50,000); thereby, owing more than $200,000 to the bank, then you would need PMI.

And unlike most types of insurance such as automotive or renter’s, the policy protects the lender’s investment in the home, not yours.

However, PMI makes it possible for people to become homeowners sooner because they can put down less than 20% such as 5% and still purchase a home.

FROM RENTER TO HOMEOWNER 

PMI allows borrowers to obtain financing if they can only afford (or prefer) to put down just 5% to 19.99% of the residence’s cost, but this ca be costly.

The home will now come with an additional monthly cost.

Borrowers have to pay their PMI until they have accumulated enough equity in the home that the lender no longer considers them high-risk.

Homebuyers who put down less than 20% of the sale price will have to pay PMI until the total equity of the home reaches 20%.

This means you have to pay 20% of your home’s value or have enough equity to build to that amount before PMI is no longer required. This can take years.

And your heirs also get nothing out of this.

Unlike most insurance policies, all proceeds go to the bank. The heirs get nada, zip, zero, nothing.

The lending institution is the beneficiary. PMI only helps the mortgage lender.

It is also not cancelled automatically.

You have to draft a letter to the lender explaining that the LTV of the home is now 80% or less. This usually requires getting an appraisal done. This could take months!

Or the other hand, if you wait until it automatically cancels, you would have to hit 22% equity. That is a full 2% higher than the 20% that is mandatory!

Meaning you essentially paid 2% more or $5,000 that was not even required!

Some lenders even request that you pay for a certain time period. So, if your home goes up in value and just absolutely skyrockets, you could zoom past the 20% minimum needed, but still be on the hook to pay.

How fair is that?

It’s like that scene out of Wedding Crashers, “I earned those miles.”

It would be not good at all. I earned those miles.

Now let’s talk the cost of PMI.

HOW MUCH IS PMI?

PMI acts just like the Red Hot Chili Pepper’s song Give it Away, in that you are giving this money away to insurance companies and that’s it.

PMI can cost on average between 0.05% and 1% of the entire loan amount annually. In some cases, maybe even more.

This means if you purchase a home for $250,000 and owe 1% annually for PMI, you will have to fork over $2500 per year. This equates to $208 monthly!

The more house you buy, the more the cost goes up.

If it takes 5 years to build up enough equity in the home to stop paying PMI on a $250k mortgage, that would mean paying $208 x 60 (months) = $12,480! And that money is burnt. You cannot get it back.

Did I also mention that as of 2018, PMI is no longer tax deductible?

That’s right. Insurance is just in case. And in this case, that is like throwing out two hundred dollar bills out your car window once a month!

So, you have to find a way to roll up those windows and plug that money leak.

HOW YOU CAN SAVE $10,000 BY AVOIDING PMI

You have to find a way to keep your money in your pocket and not the insurance companies.

Better yet, find a way to not only keep it, but make money with it.

Putting that $208 into stocks over the course of 10 years could net a return of over $37,000 with an 8% return!

If you can avoid PMI all together, you could save yourself over $10k!

For example, let’s say you have to pay $250 per months for 4 years, that is $250 x 48 (months) = $12,000.

In order to save $10,000, you would need to eliminate paying $208.33 a month for 4 years, that is $208.33 x 48 (months) = $10,000!

HOW TO AVOID PAYING PMI

There are a few ways to avoid paying PMI and they are the following:

  • Put down a 20% down payment.
  • Lender paid mortgage insurance (LMPI) where the cost of the PMI is included in the mortgage interest rate for the life of the loan.
  • Get a piggyback mortgage where a second mortgage or home equity loan is taken out at the same time as the first mortgage.
  • Find a lender willing to forgo PMI.

The last one is a little tricky.

There are not many places I could find that allowed this. However, there are some financial institutions that will offer a 100% conventional mortgage without PMI. You will just need to do an online search in your state.

So, there you have it.

I have showed you several ways to avoid PMI.

Now, I have saved you $10,000!

What is my fee for this service?

Only for you to share this with someone else.  And by doing so, help them save $10,000 as well.

She then takes a bow and says thank you for taking the time to read this post. I’ll be here all week!

Financial Freedom, Real Estate

American homes are now $1,100 per month storage units

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American homes are becoming expensive storage units.

A house is not a home unless it contains food and fire for the mind as well as the body. – Benjamin Franklin

According to Zillow, the median home price in the United States is $200,000 across the country.

According to CNBC, in other cities across America, the price of a home is even higher.

That’s not too bad.

However, considering that the median income is $50,000 buying a home can be tough.

That would mean to purchase a home, based on the median price, you would have to spend up to four times the average median income!

Um. Hold up. I do not want to be house rich, cash poor. So, I suggest that people wait to buy until you can afford a decent down payment.

Lately, I have heard a lot of stories from friends, colleagues, and acquaintances about their desire to purchase a home.

I am all for it. I want what they want. It’s the American Dream after all, isn’t it?

Not according to some.

There are quite a few financial experts and self-made millionaires that feel a home is a liability and not an asset.

Unfortunately, in many ways a home is a liability. Unless it gives you money, its taking it from you.

Let’s examine this further shall we.

HOME OR STORAGE UNIT

Times have changed.

I remember when one parent would work and the other would stay home and take care of home. One working parent was able to put food on the table and provide for a family of four or five.

You could come home after working your nine-to-five and enjoy spending time with your family. You could eat dinner together and just enjoy relaxing in your home.

There were less cars on the road as many families in the 1950’s had only one car. There were not four licensed drivers and three cars.

Then in the 1980’s we went to two cars. And families were still able to put food on the table and take a yearly vacation.

If you want to have some additional confirmation and perspective on how times have changed, watch the scene in the film Back to the Future where Marty (played by Michael J. Fox) from 1985 says we have two televisions and listen for the responses from his family from 1955.

That’s right. One home, one car, one television. Simple, right. The good old days.

Well, those days are long gone for most folks.

It now takes most families having two incomes. And that is just to make ends meet. Many Americans are now living check to check.

It is not uncommon today to have two working parents.

Not only that, but to have one parent working multiple jobs.

For some people, it has gotten so bad that they are practically (or literally for some folks in Silicon Valley) living in their cars.

People go out, earn the money, and then spend upwards of 50% of take home pay on housing.

And that is after taxes (net not gross).

With housing prices in cities going for $500,000 or more, most of your paycheck is gone.

And yes, homes are going for half a million in various parts of the country. That is fact, not fiction.

According to Zillow, the median list price in Washington, DC is $568,600.

According to CNBC, in other cities across America, the price of a home is even higher.

Now working adults have to move further away from their jobs to find affordable housing. As to earn a decent salary usually means longer commutes, when you work in the city.

I live in the Washington, DC Metropolitan area. It is not unusual for someone to regularly have a one-hour commute.

The DC area has the second-longest average commute with an average travel time of 46 minutes or just under 25 minutes per one-way commute.

Let’s do a little math.

You start your day at 5 am. Get to work by 8 am. Put in the customary 8 hours. Travel back home and get there by 6 pm. Eat dinner, hug the kids, watch the evening news, and get ready for bed at 9 pm. Get the standard 8 hours and then do it all over again until Friday at 5 pm.

If you calculate through all that time, you will see you only spent about 5 + 8 = 13 hours at home and eight of them while you were asleep!

Oh, and don’t forget the weekend trips to the wine bars, parties, and regular outings or errands. Yep, again that is all time spent away from home.

You are not really utilizing and enjoying this home you are working so hard for. It has become a pit stop on the way to the work, the grocery store, the dry cleaners, soccer practice, and the trips to the Caribbean.

Basically, your home is storing your stuff.

You are either gone, going away from home or asleep most of the time your there.

Mighty expensive digs to be fronting as your own personal hotel, if you ask me.

Now let’s look at the cost of buying and furnishing a home.

BUYING THE AMERICAN DREAM

Not so long ago, families bought starter homes with hopes of trading up later when finances permitted to get their dream home.

Now, I hear more folks buying the dream home as the starter home.

So, instead of buying a condo or townhouse, people are getting 5-bedroom single family homes as the forever home.

Well, guess what? Dreams costs…. A lot.

Not only are homebuyers ponying up bigger down payments and closing costs for this mini Mansion, but also have to furnish it.

Trips to Ikea and Pottery Barn are being replaced with expensive interior designers and Havertys.

Not to mention, the costly window treatments ($500 per window), replacing new carpets with newer carpets, custom chef’s kitchen, fancy gas range, custom back splash, French doors, custom king bed, home office with Vizio or MacBook laptop, and the pool furniture.

And don’t forget buying a state of the art sound system for the man cave.

After going through every room, you spend enough dough to put one kid through college furnishing your new home.

Let’s add it up.

Home purchase price: $400,000 (approved for this amount)

Living Room Furniture: $10,000

Dining Room Furniture: $5,000

Bed Room Furniture: $8,000

Man Cave: $3,000

Kitchen remodel: $9,000

Office Furniture: $3,000

And you budgeted $240,000 for the home and $15,000 for the furnishings. With a total of $255,000.

However, what was spend was this: $438,000

That’s a difference of $183,000!

You could buy another house for that amount. You could then keep one and rent out the other. Merely a suggestion.

STORAGE UNITS FOR $1,100 PER MONTH

You read that right.

That comes out to $13,200 per year.

You’re essentially paying the bank thousands of dollars annually for you to literally have a place to store your hat box.

If you invest money in the stock market over 30 years and get a 7% return, you could have over $600,000 squirreled away!

Forget what lenders say you can afford. Do what you know you can afford.

Don’t be led astray from your budget. Stick to it. This will help you prosper and thrive instead of just survive.

Moral of the story: Don’t let your dreams be bigger than your wallet.

Financial Freedom, Real Estate

Home Buying: Survival of the fittest wallet

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They say home is where the heart is.

However, in current economic times, I have learned that home buying is not for the faint at heart.

The process of buying a home today is treacherous because banks have once again started lending more than you can possibly afford to repay. Proceed with caution.

Due to the cost of renting increasing into the stratosphere, it makes owning almost inevitable.

Buying a home now is like playing Russian roulette with your finances. Eventually, your wallet can’t dodge the bullet.

After speaking with numerous colleagues, friends, family, and acquaintances it is safe to say that the subprime mortgage crisis is roaring back into people’s lives like a lion.

Housing prices are getting out of control again in America.

This is some of what I have uncovered so far.

Rent too high, houses too small.

Rent is too high. There is no cap on rent. Sky is the limit. And that limit is going to the ceiling. It is no secret that renting can be expensive. This is acutely felt when living in high cost areas such as San Francisco and New York. Rent has doubled in the last 20 years. Read this article Rent is totally out of control. Making it harder for folks to save and buy a home of their own.

Low cost-housing is shrinking. As neighborhoods around the country gentrify, more people are being displaced. I actually saw blogs and articles about people discussing living in cars, vans, and in their cubicles!  That’s no joke. Read the article here I secretly lived in my office for 500 days.

The country is also losing 125,000 affordable rental units a year. Read all about it  The affordable housing crisis.

Amount of homes available to buy is too small. Not only are there not enough homes for sale on the market, but the ones that are more affordable tend to be on the smaller side.

Location, location, location. Many are priced out of major metropolitan cities where the jobs are plentiful. I work in the Washington, DC area and the location I commute to has homes on the market in the millions! That’s right folks, if you can write the next hit song for Beyoncé, then you can afford the housing prices in certain parts of the District.

Applicant pool shrinking. The amount of folks actually able to buy a home is getting smaller. Financing may be a little harder to come by when you owe tens of thousands in credit cards, auto loans, and student loan debt. Fewer people are able to not only apply but be approved for home loans. Thus, creating a vicious cycle of not being able to afford to rent but not having enough to buy.

Prices of homes on the market are increasing. This is where I get steamed. I have heard of people being approved for anywhere from $250,000 to $625,000. Even on one salary! Come, on. This is not legit. It makes no economic sense to put yourself into a mortgage that you can’t afford or that would possibly lessen your quality of life.

I read that it is best to purchase a home for about half of what you are approved for so that you will not become house rich, but cash poor.

In addition, you should put no more than 20 percent down as anything more could expose you to unnecessary risk. Should the market go down and your home goes under-water so too does your down payment as it now sleeps with the fishes. This means you got too much skin in the game.

A house is not a home. Fill it with love and laughter. Easier said than done. First, you have to find a partner. If not, you have to be able to afford to live alone until you find one and that my friends can be expensive. Don’t believe me, then read this It’s getting very expensive to live alone.

Foreclosure. You go and get a piece of the American Dream and buy a home. Congrats! You own a slice of American pie. Then it all comes crashing down as your home plunges under-water and your adjustable rate mortgage loan ballooned your payments from an affordable $1,200 a month to $3,000. This not only displaces your family, but hurts your credit.

Short sale. Due to circumstances that may be beyond your control; you lose your home. You owe more than the home is worth prompting you to decide to sell at a loss. The added pressure of a lender sending an eviction notice and threatening foreclosure aggravate this process.

Save for a home. For all the reasons stated above is why you must save for a home and not let your eyes be bigger than your wallet. Forget the Joneses. I mean what did they ever do for you anyway. Are they going to take you in when the sherriff shows up to evict you? No way!

My advice is to put aside the 20 percent down payment over a two to four-year time period. Find a home you like. Get the price and figure the amount you need to save over four years to have the down payment. That would mean saving five percent of the purchase price annually.

For example, $180,000 x .20 = $36,000/4 = $9,000 per year or $750 per month. This decreases the amount you have to finance and lessens the amount of interest you pay over the life of the loan.

You can use these posts to help be your guide and inspiration toward saving a down payment.

Getting back to cash only

How to build an emergency fund

Morale of the story: Let the American Dream be whatever and wherever you want it to be as long as it’s in a neighborhood you can afford.