Assuming that the average house today cost $170,000.00. Assuming your wife wants a better home for you and just over 2 kids. Assuming you're not still a teenager. Assuming your life is stable. It's time to buy a house!
Assuming you're a first time home buyer or starting over. Assuming you've got a little savings, but not a lot. Assuming you've paid your bills consistently. It's time to buy a house!
Assuming you don't have $34,000.00 plus closing cost and moving cost and utility deposits. Assuming you can save slowly. Assuming the nice home you're renting is making the land lord a profit. It's time to buy a house!
It's time to buy a house! But, with out sufficient savings just what is this opportunity going to cost?
Lenders demand 20% down or they require a bond to assure your performance (your payments) if you lack any or all of the 20%. This bond is called PMI or just MI for Private Mortgage Insurance or just Mortgage Insurance.
Bonds come in two forms, cash bonds where you post cash or property to protect the insured or insurance where you pay an insurance company to protect the lender. If you had the cash you wouldn't need a bond, Insurance bonds are your only choice. Many of you understand bonding, if you handle large amounts of other people's money. In many states Mortgage and real estate brokers even some sales people are bonded. The cashiers at your bank or even at your grocery stores are bonded!
It's unfortunate that this is called PMI because the "Insurance" confuses many people, even real estate and some mortgage professionals. It's a shame they didn't call it HBPB for Home Buyers Performance Bond! HBPB would be more descriptive and easer to understand! You pay for PMI to guarantee your obligation to the bank! Paying for PMI is like buying life insurance to guarantee your obligations to your family. You are never the beneficiary of PMI or Life insurance, for any one to collect on one the loan has to die (you default) on the other you have to die, either way you never get the money!
We need to diverse for a moment because the proliferation of "Short Sales" people selling their homes for less than what is owed on them. People buying with PMI having less equity are more likely to need a short sale than those with more equity. If you should need a short sale the PMI company will have to be dealt with. You will never deal with the PMI company, the PMI company will never stop a short sale! But, your lender may tell you the PMI refused your offer, the PMI company wants more money, it's all a lie. It's a negotiating ploy by the bank! Only the bank deals with the PMI company! The PMI company doesn't receive any money in a short sale! They may pay money to the beneficiary, to the bank.
When the bank says the PMI wants more money they mean the PMI company wants to pay less. The thing is the PMI company isn't obligated to pay any thing in a short sale or settlement! Like your life insurance isn't obligated to pay for your suicide! If the bank settles they killed the loan so they can't collect, but of course PMI will often pay! PMI will pay because if the bank forecloses they will normally be obligated to pay the full policy amount! So like the bank PMI will negotiate if it's in there best interest, if it cost them less than if the property is foreclosed upon!
If you've read many real estate blogs you've seen many REALTORS® complaining that their short sale offers were turned down when they were more than any other offer all the bank could except! On our hypothetical $170,000 house that PMI insurance could pay the bank as much as $27,455.00! To your bank your loan may be worth much more dead than alive! Remind your spouse to deal with the insurance company before using the key to the gun cabinet. If the bank turns down what you think is a great offer, you probably don't have all the facts.
What's the opportunity cost? On our hypothetical $170,000.00 purchase the buyer puts 5% /$8,500.00 down and barrows the balance, the PMI will cost $134.58 per month! If the buyer had to save the other 15% down, $25,500.0 at $134.58 per month it would take them 189.48 months, nearly 16 years! The cost of opportunity is nothing compared to 16 years of additional renting!
In most but not all markets buyers generally get a much better homes for lower cost than renters! So even though you pay the PMI each month the cost of for the opportunity is negligible if not negative. When your loan reaches 78% of the current property value (at any time after 2 years) the lender is required to drop the PMI and your payment will go down! Even in a falling market amortization will eventually reduce your balance below the 78%, and you'll probably have save money each month compared to renting.
Want to save even more with even less money out of pocket? Look into FHA.
Now go buy a house!
Bill
William J Archambault Jr
The Real Estate Investment Institute
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