The Down And Dirty Facts About FHA Insurances

Home owners and occupants do not consider themselves investors trying to make money, so they pay full price to buy a house and get a government-secured insurance to buy it, without thinking about it much. Most of their focus is on choosing the right neighborhood or the right style and location. These basics are more important to them than money. They kind of assume that the value of their home will eventually go up.

The other sector is 20% of the buyers and sellers who make up the investment market. These are sellers who sell at a discount, and buyers who buy at a discount. These buyers and sellers are consciously trying to make a profit, and their goal is to make money or create wealth.

But I believe all homebuyers are real estate investors, for the simple reason that no one buys a home with the intention of losing money. But with insured government insurances, that’s what usually happens.

As a result of ongoing government intervention since the Great Depression of the 1930s, the mortgage industry today has grown into a half-private, half-public money machine that has become a monster.

While government-secured insurances such as the FHA, Virginia Cells, and the USDA were created to help low-income buyers afford a home mortgage, the result has been expensive insurances that will more than double home insurance costs.

Note I lowered the cost of the insurance. Not the cost of the house. The property value has been set. It’s the insurance costs that are going up. Few insurances are more expensive than government-insured insurances that are supposedly designed to help low-income buyers.

Most retail buyers who use a traditional FHA, (government-insured), mortgage to purchase a home never realize the true costs over time. Conventional mortgage insurances can be expensive. In the traditional world, the real cost is more than twice the advertised cost of a home.

Here is a quick example: FHA insurance

Perhaps 90% of all regular home sales are financed this way. You borrow $95,000 to buy a home that costs $100,000. You can bring $3,000 to closing to pay the insurance origination fee. You can bring in $5,000 to close the down payment as required by the FHA. You can bring an additional $3,000 to closing to cover everything else, such as attorney fees, courier fees, processing fees, appraisal fees, taxes, insurance, more fees, and…you get the idea.

You now “own” a house with the following generic numbers:

  • Estimated value: $100,000
  • Down payment 5000 dollars
  • The insurance amount is 95,000 dollars
  • Fees and costs: $6000

Private Mortgage Insurance (PMI), currently calculated as: 0.078% / 12 of the insurance amount. Here’s what it looks like: $95,000 X.0078 = $741 divided by 12 = $61.75 per month.

This “Private Mortgage Insurance” is the key to getting your “Government Insured” insurance. The premium is added to your monthly mortgage payments. You’ll pay this premium every month for about 20 years. So your $95,000 insurance would cost an additional $14.820.00 for mortgage insurance.

Mortgage professionals will be quick to point out that the PMI is what enables low-income buyers to get a home insurance with a 5% down payment. Before the advent of PMI, the first payment required was 20%. On a $100,000 home, this would be $20,000 less.

Most people no longer have a 20% down payment, so PMI was invented to allow home ownership for people with low down payments. It has its own purpose, but most buyers are usually not aware of such a large cost.

There are a lot of costs associated with traditional mortgage insurances, along with tax and insurance burdens, home ownership is becoming less and less expensive, despite “modern” financial instruments like PMI.

So, going back to our $100,000 home… what does this deal look like? Would we acquire stock and build a nest if we bought this house with a “traditional” mortgage?

After doing a quick math on a regular mortgage calculator, I came up with the following:

  • $100,000 home, FHA insurance with $5,000 down payment, $95,000 insurance amount. A 30-year fixed rate of 6% means you’ll pay:
  • $95,000 borrowed. (owner)
  • $110,046.28 at INTEREST
  • $14,820 for PMI Insurance (plus monthly payment)

So your $95,000 small mortgage has turned into an expensive alligator that will actually cost you at least $219,866.28!

So, you’re starting as a new homeowner already $6000 down the hole, and even if your home doubles in value over the next 30 years, you’ll still lose $20,000!

We didn’t even discuss the costs of it Property TaxesAnd insurance And Ongoing maintenance.

Buying a home the traditional way is very expensive and rarely leaves the buyer any real ownership at all. Most people don’t actually realize a real profit from selling their homes, they simply recoup the expenses they already paid when they sell “at a profit”.

Whether you are buying your first home or your 50th home, you should always think like a real estate investor. Find the best deals in your desired area. Negotiate the purchase price, buy at a lower price than you think you can afford it, and then prepay a principal every month from day one to reduce costs further.

Better yet, find sellers who are willing to finance for you, and avoid exorbitant insurances altogether!