I’ve been thinking a lot lately about our culture’s tendency toward bigger, more expensive, better. It’s easy to spot in the little things; overbuying at the supermarket and then needing to throw food away, buying clothes that you never wear. But more significantly, it’s also prevalent in the big things; buying an enormous five-bedroom house for a family of three, for example, that takes up vital resources (gas, electricity) in addition to costing a fortune.
Most of the world doesn’t live like that. And these days, most ofAmericacan’t afford it either. However, the particularly American dream of owning a home should still be achievable. The first thing to think about when buying a house (aside from the emotional considerations of making a home) is always the financial aspect.
If you’re one of the many people who can’t afford to put down the preferred 20% down payment, then you will be required by the lender to get mortgage insurance.
The Definition of Mortgage Insurance
Mortgage insurance (MI) is not the same as mortgage life insurance (which pays off a mortgage if the homeowner dies or becomes disabled) or homeowners’ insurance (which protects homeowners from loss due to theft, fire or other catastrophe). Private mortgage insurance, orPMI, protects the lender and investor from loss, not the borrower.
Mortgage Insurance Financial Benefits
As you consider all the facets of being a homeowner and how it will affect your financial well-being, consider this: MI is not only a requirement for people with less than 20% to put down, it’s actually affordable. One loan with mortgage insurance is often a lot cheaper than taking out two separate loans. In addition, there are tax benefits for both first-time and seasoned homeowners.
Additional Benefits to Mortgage Insurance
With some institutions, you can qualify for additional benefits and perks. Genworth Financial for example, offers job loss protection so that you can continue to make mortgage payments if you lose your job. In this economy, unfortunately, it may be the only way to prevent foreclosure. Mortgage insurance plans may also come with discounted offers and special rebates from well-known vendors such as Sears and Bed, Bath & Beyond so that you can get to the fun part of owning a home.
It’s a positive thing to buy a house and make it the home you always dreamed of. It’s something everyone should experience. But it’s important to make it happen within your means. Sometimes mortgage insurance is the only way homeownership will ever be possible.
So, what do you think? Would you buy a home with mortgage insurance or would you wait until you had your 20% saved?
This post was written by Clint from Genworth Financial.
I avoided PMI by taking out a blended mortgage (I only put 15% down). I had 20% saved, but I wanted to keep my cash EF in tact as well as be able to pay for all necessary reno/moving expenses. I secured a great APR for both parts of the mortgage, and I’m now refinancing to roll both mortgages into one (at an even lower rate!). This strategy worked quite well for me and I’d definitely recommend that people at least investigate the option to do so with their own purchase.
Interesting. Seems like you got yourself a good deal. I am all for exploring options and seeing what can happen. However, I like to encourage people to be educated about what they are dealing with. You are able to make a much more sound decision when you have knowledge to do so.
Personally, this kind of insurance isn’t my major concern for many people. I think beyond self-insurance, such as an adequate emergency fund, and disability insurance, this may be a nice benefit (especially for the lender); however, perhaps these funds would be best spent working on other financial goals including: paying off debt, building financial solvency, making sure one has adequate life insurance, funding retirement, funding education for children if applicable, saving for vehicles, building alternative income streams, and building overall wealth. Fortunately, with my down payment, I didn’t have to pay PMI.
I agree. There are much better ways to put this monthly payment to use. We too are fortunate and don’t pay PMI either. We put down our 20%. I say it is good to wait and make sure you have the resources before you purchase anything.
Huh, I’ll have to look into this further. My initial response is I want the 20% down, but this option doesn’t sound too horrible.
Stick with the 20%. As much as PMI can help you get a house a bit quicker, I would wait and save.
When I returned from Japan, I had whether or not to buy a home. I had the money to make the down payment and could have easily afforded one. Then I decided that I could they a whole lot of money and have a lot more fun if I was homeless. I have been a digital nomad for nearly 3 years now an it was a great decision for me. Of course, this doesn’t make sense for a lot of people, but I think it is an option that is often forgotten or ignored when making the decision of whether to buy a home, especially if someone is not married.
True. If you are single and you don’t have to look after anyone else other than yourself, there may be more options to consider. I don’t know too many digital nomads so getting to know you better would be great. I am sure there are lots of interesting things you can share.
I went with an 80/10/10 mortgage (80% first mortgage/10% second mortgage/10% down payment), and it got me my first house without having to pay monthly PMI of about $75 per month. I found this really helpful, but PMI can be a great fit for others.
Sounds like an interesting combo you did. Glad you found something that worked for you. I much rather prefer just putting the 20% down.
Avoid PMI at all costs. It is such a waste. There are some creative financing out there to help get away without paying PMI, you just need to search a little more for it since the housing bubble.
I agree. PMI isn’t the best way to go. I would rather wait and save the 20%.
It’s interesting because I would agree with you when it comes to the 20% down about 98% of the time Miss T, but yet I bought a house with less than that and did pay a small PMI fee. The reasoning behind this was that I was moving to a rural area with little in the way of rental housing (to pursue a teaching position). A teacher was leaving the area and subsequently I knew I had leverage because she wanted to sell ASAP in order to get her new house in order (literally and figuratively). Because the cost of the house was relatively low (under 100K) the PMI didn’t cost all that much, and when combined with currently low mortgage rates it made more sense than renting. A potash mine has recently expanded in the area, and small amounts of oil as well, since I moved in housing prices have risen roughly 20-30% (not that hard in an economically depressed area) so the investment paid off well for me. Plus, I ended with a great house (it would cost about 700K or so in a Vancouver or Toronto suburb I would imagine) for below market value. Even if it was the “wrong” technical decision, I have no regrets!
Glad to hear this worked out so well for you. Yes, the 20% rule is a good one to follow most of the time, but like you have shown here there are exceptions, just like there is with anything else. With interest rates being as low as they have been, and with housing prices being less than normal, you can do okay with paying a small PMI. Sometimes doing things like this is the cost of pursuing opportunity. For the masses though, I still want to encourage people to save before they spend.
They increased the rates January 2011 for PMI to almost double what they used to be. They were bad enough to begin with and then they made it even more expensive. If it is the only way someone can afford the American dream then I can understand it, but I think they should keep in mind to either try to refinance to a conventional loan at some point or if their lender allows, order another appraisal in the future to waive the fee if 20 % equity can be shown. Although I know a friend who currently has PMI and she cannot use the current market value of her home to show the equity and must pay down 20% of the ORIGINAL appraised value. So it is important to read the find print and know what you’re getting into. Also, for those that served in the military a VA loan is an option and the government picks up the risk for the borrower so no PMI 🙂
If saving up for a little bit and being frugal is an option I would definitely go that route as opposed to paying into a fee that does not help me at all as a homeowner.
Great points. I didn’t even think of the veterans thing. PMI can work out for some but only those who have a real clear vision of their financial picture and for those who can outweigh the cost of the house. Otherwise, like you, I think people should save first.
great post and informative site