What is Mortgage Insurance?

For those of you that have purchased a home before, you may be vaguely familiar with this term. But for those who are looking to buy their first home, the term “mortgage insurance” may not be ringing any bells.

So what exactly is mortgage insurance? In simple terms, mortgage insurance is a premium that the buyer pays to the bank in order to insure the mortgage they gave you. In even simpler terms, you are paying an insurance premium on the bank’s mortgage. Why? For starters, mortgage insurance is only paid when you are putting less than 20% down on a home purchase (or when your mortgage is greater than an 80% Loan-to-Value/LTV ratio). Please note that this may vary depending on the loan type.

Again, why? Basically, the bank has set a line of risk for itself; that line sits at 80%. If you put 20% down (or more) on the purchase of your new home, you are considered less risky in the eyes of the bank. If you put less than 20% down, you are considered more risky. In the bank’s experience, those who are considered “more risky” have a higher risk of loan default (e.g. you stop paying your mortgage). Because of this default risk, the bank wants you to pay for the insurance on their loan.

Now that you know what Mortgage Insurance is (a.k.a. MI or PMI), check out this recent article that discusses how to get rid of it if the bank is forcing you to pay. Please also feel free to shoot me any additional questions.

“Should I Rent,” or “Should I Buy”? Here’s a real example…

For those of you who read this blog regularly, you’ve probably seen me discuss this subject before. The reason this subject is so popular today, is because there really is no clear cut answer to the question: “Should I rent, or should I buy?” It depends where you work, where you live, how much money you have, how much money you’re willing to spend, and so on and so forth…
 
To make this a little more concrete, let me use a real world example. I currently have a listing in South Philly that’s for sale; let’s say this is where you want to live. The list price is $92,900 and the address is 2432 S Beulah St. It’s a rehabbed property (floor to ceiling), it has 2 Beds/1 Bath, and is in a dense, urban neighborhood. You can walk to almost everything, and can use public transportation for the rest. This is the sort of lifestyle that most young, aspiring, urban-minded singles and couples strive for today.
 
The only problem is, you’re not sure whether or not it makes more sense for you to rent or buy. What you do know is that you need a place to live and this is where you want to be. So, how do you make the right decision? Well, there is no right decision per se, but you can compare and contrast the two options. Option #1 would be to rent a place just like this (in the same neighborhood), and Option #2 would be to buy this home.
 
Let’s look at a “Rent vs Buy” comparison for 2432 S Beulah St:
 
Option #1 – Rent
  • Average Rent: $750
  • Upfront Costs: $2,250 (First, Last, & Security)
  • Monthly Payment: $750 (Rent) and $25 (Renter’s Insurance) = $775
  • Is this considered an investment? No
  • Are there any tax benefits? No
Option #2 – Buy
  • Sale Price: $92,900
  • Upfront Costs: $3,252 (Down Payment, FHA), $4,180 (Closing Costs, Estimate) = $7,432
  • Monthly Payment: $481 (Principal/Interest), $67 (Mortgage Insurance), $45 (Taxes), and $35 (Homeowner’s Insurance) = $628
  • Is this considered an investment? Yes
  • Are there any tax benefits? Yes
Okay. Now I know there are more factors involved when looking at renting vs buying, but these are how they compare financially. Still not enough for you to make a decision? No problem.
 
Here are some Pros/Cons:
 
Option #1 – Rent
  • Pros: It has cheaper upfront costs, you are not responsible for repairs (unless you break it), and you can usually decide to leave after staying for about 1 year.
  • Cons: It’s not your own home, you can’t make changes/upgrades, you’re subject to a landlord/landlady, your money is not invested in anything, your rent can increase, and you’re not really interested in what happens to this property in the long run.
Option #2 – Buy
  • Pros: You are investing in a neighborhood/community, you own a tangible asset, you have the ability to hold/sell/rent, you can make changes/upgrades, you get tax benefits, and you could potentially gain appreciation.
  • Cons: You’re not sure what price is fair, you cannot predict the future, and you may not want to stay.
So as you can see, there are differences from a financial perspective as well as pros/cons. Again, everything I have just written is not how everyone perceives “renting vs buying.” It was meant to look at both sides of the coin so you can see why one way might be a better fit for you than the other. I work with both renters and buyers, so I get to see both on a daily basis. Some rent when it’s clear they want to buy, and some buy when it’s clear they want to rent.
 
There is no right or wrong answer. The only true answer is that everyone needs a place to live, so you will have to choose one of these options. Your best bet is to sit down and put pencil to paper; then compare and contrast. I hope this example helped.