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Oconomowoc Mortgage Lender

When Do You Pay More Than The Cost?

As we continue in our First Time Buyer Education Series, please be sure to Never confuse the amount of your monthly payment with the actual cost of owning. A typical monthly payment includes principal, interest, taxes, insurance and, in some cases, mortgage insurance.

 Example:

$250,000 home

$4,000 per year taxes

$800 per year insurance

$200,000 30 Yr. Fixed Loan at 4%  =

The principal portion of the payment is not a cost; it’s a reduction of the loan balance. With each payment, you increase your equity by the same amount. For our example, the average principal installment for the first year is $294/month.

Owners who itemize can usually deduct the cost of interest and real estate taxes. For our example, an effective tax rate of 28% would reduce the cost by $279/month. (Avg. 1st yr. mo. interest paid of $661 + taxes of $333.33 x 28% = $279) Always consult with your tax advisor regarding your situation.

 Despite the ups and downs, over the last 50 years, annual nationwide appreciation averages more than 5%. Even using a more conservative rate of 3%, the increase in value represents $625/month.

 That brings us to:

Most of these benefits aren’t realized until you sell, so owners still have to be able to make the regular payment each month. Accumulating equity and earning appreciation take time. Consider the cost of maintenance and repairs, too. But when you think about what you would have paid in rent, it’s clear that owning a home can be a great way to build wealth.

And it’s also clear that the true cost is typically far less than what you might write on a check each month. Contact our team to get numbers specific to your purchase price range. 

Note, this scenario is just an example and not intended to reflect the current market or forecast for rates, prices, taxes or insurance. All of these factors are subject to continual change.

Conventional PMI Options

Mortgage-InsuranceIt’s common knowledge that home mortgage loans with less than 20% down typically need to be covered by some sort of mortgage insurance.

For conventional loans, it is usually referred to as “private mortgage insurance” (PMI), for government loans (FHA, VA and USDA), the insurance is some sort of program offered by the federal government that also has costs associated with it like PMI, but it has a different name.

While I am licensed to do all of these types of mortgages, for this post’s purposes, I will write only about the insurance that is private – PMI for conventional loans.

There are many different ways to insure a conventional mortgage. All of which are types of PMI. Each one is shown below.

Borrower Paid – Monthly
This is the PMI you probably know about; it’s simply a monthly insurance fee that you pay each month until your loan is eligible to be uninsured. For a well-qualified credit scenario, this tends to cost about .05% of your loan amount each month; for a $200K loan, that’s about $100 a month.

Borrower Paid – Single
This is a one-time fee paid at closing by you or by the home-seller that covers the loan until it is paid in full. For a well-qualified credit scenario, this tends to cost about 1.7% of your loan amount; for a $200K loan, that’s about $3,400. If you do the math, you will see that $100 per month versus $3,400 paid once has a break-even point of 34 months. This means that this option is typically much better than “Borrower Paid – Monthly” if you intend to keep the loan long-term. It’s of incredible value if you can get your seller to cover that cost for you at closing (have your real estate agent talk to me before writing your offer)!

Lender Paid – Single
This is the same as “Borrower Paid – Single” but the lender increases your rate to cover that cost – typically the increase is 0.375%-0.75% in rate depending on the loan amount and the credit-scenario. This is a great way to make your mortgage insurance tax deductible. Presently, mortgage insurance is not tax deductible. If we build it into your rate, it becomes interest and, in most cases, will become a tax deduction for you. Check with your CPA to make sure you can write it off (I have to say that because I am not a CPA)!

Borrower Paid – Split Premium
This is a hybrid of the first and second options above; you or your seller pays a one-time fee at closing of 1% of the loan amount and you then pay a monthly cost of about 0.0275% each month for well-qualified credit borrowers. In dollars, using the $200K loan amount example above, this would be $2,000 one time and about $55 per month.

To get numbers for each of these options for your specific loan scenario, whether you are in Wisconsin or California, please be sure to contact me for more information.