Thomas W Davis' Blog
Part of buying a home is researching the market and your finances. Most lenders require you to put at least 20 percent down or pay private mortgage insurance (PMI). Since PMI is a cost that does not lower your interest rate or principal, it’s almost always better to save up that hefty down payment. Lenders charge PMI to cover some of their risk if you do not put the 20 percent down to create equity. Conventional loans backed by Fannie Mae and Freddie Mac always require PMI if you do not put 20 percent down.
In some cases, you could avoid PMI by taking out a special loan or a VA loan. VA loans are only available to veterans, but require very little down or even zero down. The VA doesn’t actually give you the loan—it insures your loan against default. Conventional loans not backed by Fannie Mae or Freddie Mac often have higher interest rates. These two programs are also government-insured loans.
Other reasons to avoid paying PMI include:
Tax laws change every year. As of 2017, PMI was no longer deductible, which means that you lose that offset.
The lender is the only beneficiary. If you should die before your loan is paid off, it will pay only the lender and only for the balance on the home.
You pay PMI until the equity on your home reaches 20 percent. If the market was good when you bought the home, but it tanks a couple of years later, you could be stuck paying PMI for many years.
Some lenders require you to pay PMI even after the equity in your home reaches 20 percent. If you do have to take PMI, always read the fine print.
Finally, PMI is difficult to cancel. You will need to write a letter to your lender to cancel the PMI. Until you hear from the lender, you will be stuck paying those premiums every month.
PMI ranges from .5 percent to 1 percent of the amount you borrowed paid out in equal monthly payments every year. Thus, a loan amount of $200,000 could have a $2,000 per year PMI premium, which is about $167 per month added to your mortgage payment until the lender agrees to cancel the premiums.
Saving the Down Payment
In addition to saving for a down payment, you may qualify for some down payment assistance programs such as the first-time home buyer’s program. These programs help you get that 20 percent so that you do not have to pay PMI. If you have a retirement account, you may be able to use money from that account to help with a down payment.
Though it may seem painful to pay such a large chunk of money, it saves you from paying insurance premiums and it lowers the cost of the loan since you don’t pay interest on the down payment and it is applied to the principal.
In an age where collaboration is on the rise, it’s not surprising that some are looking to find an alternative source of funding for their home or business purchase. Crowdfunding has been a successful way to fund various projects and business propositions, but it seems that some have found a way to make it work when purchasing property. The only question is, where’s the catch?
Banking Institutions & Lenders
It’s no secret that crowdfunding may cut into the banking industry’s bottom line. And yet, some people are highly successful when it comes to utilizing it to secure their properties. How do they do it? Diligence and strategy.
Each donation by patron, if the funds are to be used immediately, is considered a gift. These gifts require letters stating that the funds don’t have to be paid back and are, indeed, a gift.
If you only have a few people donating to your crowdfunding campaign, that should be apiece of cake. However, if you have multiple donors, you might want to start checking them off one-by-one as they give until you’ve secured letters from all of those willing to send them to you.
If you run into anyone who isn’t willing to write the letter, is unresponsive, or you simply have time to wait on your purchase, you can put the funds from your crowdfunding adventure into a different account, and leave them alone. After a few months, the funds will have aged and may no longer need a letter.
The success rate is still iffy on securing funding through crowdfunding sources, however. The biggest hurdle is whether your lender will approve this unconventional method of down-payment.
Most crowdfunding requests usually has a story or mission attached to them. Some ask for the money to help their parents out of the rent cycle because they’re retiring, while others might be looking to open a new type of coffee shop and need a little extra to get things up and running. No matter the reason, you’re selling your story, but will folks buy it?
If you choose to go the crowdfunding route, you have to remember that the people funding you need a reason to fund you. You’ll have to give them the perfect story and reasoning or you’re going to end up flat and without funding. Some find this task incredibly daunting, while others are silver-tongued pros. Either way you slice it, crowdfunding is about marketing and storytelling.
If you decide to go the crowdfunding route, be sure to do ample research, line your ducks up and ensure that you’re ready for the journey. If it seems like it’s a little too much but you still want to find an alternative method of funding, chat with your real estate agent. There’s a plethora of options available, and we’d love to help you find the right one.