Mortgage insurance is the most unappreciated benefit in home ownership. What, have you not thought of Mortgage Insurance as a benefit? Shouldn’t homeowners appreciate something that can unlock over $90,000 in wealth building in just 5 years?
There’s a saying that says “we don’t know what we have until it’s gone.” While reserved for sentimental matters the saying applies to the often hated rarely appreciated – mortgage insurance. Why? What if homeowners begrudgingly paying mortgage insurance lost the ability to own their home and found themselves renting from some other homeowner? Then, they would understand why they should have been in love with their mortgage insurance.
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Why is Mortgage Insurance a GOOD Thing?
Simply put, mortgage insurance is what allows millions of Americans to buy a home without having to put 20% down. Back in the day (way back) the only way to finance a home and make a bank feel safe lending you money was to put 20% down. As you may well know, 20% down is no longer the ticket to home ownership. Today, the “less than 20% down” buyer eases the bank’s fears by taking out a mortgage insurance policy. Mortgage insurance financially protects a lender if a homeowner forecloses on their home. It also is what enables banks to lend when borrowers put less than 20% down.
Millions of homeowners would not own homes right now if it were not for mortgage insurance.
Mortgage Insurance is Worth $90,000 over 5 years
When you run the numbers on a $300,000 primary residence purchase its quite eye opening. It’s staggering in a wealth building kind of way. Assume the following:
- Purchase price: $300,000
- Down payment: 5% ($15,000)
- 30 Year fixed mortgage at 4.0% (APR 4.315%)
- Taxes at $200/mo
- Homeowners insurance at $50/mo
- Conservative home appreciation of 3% per year
- Borrower with 740 credit score
This home would have a monthly mortgage payment of $1754 (estimate). It would be made up of:
- Principal and interest: $1361
- Taxes/insurance: $250
- Mortgage insurance: $143/mo
If we time-lapse through 5 years we would wind up in a much better financial place. In those short 60 months:
- The $300,000 home would have appreciated $47,000*
- The $285,000 home loan would be paid down by $28,000
- We would have saved over $19,000 on income taxes (due to interest and property tax deductions)*
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Added together, you have a $94,000* increase to one’s net worth. Why would one despise the key to opening this opportunity up – mortgage insurance. Mortgage insurance allowed us to hook ourselves and our families to this locomotive of wealth building home ownership. Maybe wealth building is not for everyone ;).
*home appreciation is not guaranteed, individual tax benefits vary from person to person
By Jeremy House