This Financial Life With Anna: The American Dream Program

Do you want to buy a home but think it’s out of reach? You may be eligible for the American Dream Program which can help you buy a home for just a few thousand dollars down instead of a 20% down payment.

We know a lot about personal finance, but we can’t know everything. That’s why we love it when a listener educates us! That’s the inspiration for this episode.

Home is Where the Heart Is

We have talked a lot about buying a home, but many of the discussions have centered on rental property. And with good reason, it’s a great way to earn passive income and achieve financial independence. But for many people, a home is more than a chunk of their investment portfolio. A home is a place to call your own, a place to raise your family, and a place to make memories.

Getting on the Property Ladder

When we talk about buying a home, whether to live in or for a rental property, we stress the importance of saving up for a down payment of at least 20%. That is so you can avoid PMI but depending on the housing market in your area, that can put buying a home out of reach of many.

PMI

When you buy a home with less than 20% down, conventional lenders will require PMI, private mortgage insurance. PMI is to protect the lender if you default on the loan, and your home goes into foreclosure.

The fees for PMI vary according to the size of your down payment and your credit score. Typically it ranges from 0.3% to 1.2% of the loan amount on a yearly basis. There are a few ways to pay for PMI. Most commonly, the PMI premium is part of your monthly mortgage payment, but some lenders require buyers to pay the entire premium up front at closing.

Paying upfront is not ideal because if you decide to refinance, you may not get the premium back. Be sure to know what your lender requires if you don’t have the 20% down payment needed to avoid PMI.

Just Say No

The median sale price of a home in the US is $225,262 so if you have a PMI of 1% you will add $188 to your monthly mortgage payment! PMI is one of the things people mean when they talk about the hidden cost of owning a home.

PMI has no benefit to the homeowner; it’s for the protection of the lender. PMI payments do not go toward paying down the principal on your loan or to building equity. Mortgage insurance is tax deductible, but PMI is only deductible for married taxpayers who make less than $110,000 per year.

If spouses file individually, the threshold plummets to $55,000. PMI is nothing more than a fee you get stuck paying if you can’t come up with a 20% down payment.

Most lenders cancel the PMI requirement once you have reached 20% equity, but some require you to keep PMI for a specified period meaning even once you reach 20%, you have to keep paying. Be sure to know what your lender’s PMI requirements are.

You’re Not Getting Any Younger

The average age of first time home buyers in the US is 33. The average age of a first-time mother is 28, and for fathers, it’s 30. So by the time you’re 33, your kids are pretty tired of sleeping in a dresser drawer in your one bedroom apartment.

We would add one more commandment to the list above. Never pay PMI. But you need to buy a place now, to hell with PMI! Not so fast.