June is recognized as National Homeownership Month. Homeownership builds financial security.
The net worth of a typical homeowner is nearly 40 times the net worth of a non-owner, according to the National Association of Realtors.
With inflation at a 40-year high and the University of Michigan Consumer Sentiment Index falling this month to a 40-year low, Americans are angry. The U.S. was almost energy independent a couple of years ago and now it costs a soccer mom or dad way over $100 to fill up the minivan.
Page One of the U.S. Department of Housing and Urban Development’s website says: “HUD’s mission is to create strong, sustainable, inclusive communities and affordable homes for all.” If this mission is real, then I ask why is the mortgage insurance they are charging middle class Americans so much higher than the private sector? Yes, it is a little easier to qualify for a 3.5% down payment FHA loan than a 3 or 5% down conventional loan but yikes, the mortgage insurance is expensive, and I believe unfair.
The FHA mortgage insurance premium regardless of FICO score is 1.75% up front and then .85% annually for the life of the loan on a 96.5% loan-to-value. A conventional buyer with a FICO score of 680 and 3% down payment will pay nothing up front and .79% annually till the loan balance drops to 78% loan-to-value in seven years, or they can get the PMI removed sooner with an appraisal after as little as two years.
If a buyer does an FHA $500,000 loan today, they pay HUD 1.75% or $8,750 up front for the mortgage insurance fee plus $360 per month mortgage insurance premium. If this middle-class American sells her house in two years and pays off the $500,000 loan, she gets none of the $8,750 mortgage insurance refunded.
I understand the risk and I get the idea that the Great Recession was rough but, from 2003 to 2007, HUD was barely exposed to the huge losses that resulted from the Wall Street funded mortgage fraud scheme that took place from 2004 to 2007. Buyers didn’t need FHA loans from 2004 to 2007 and sellers wouldn’t take offers from FHA buyers here in Solano County during this period because a 680 FICO score buyer could purchase a home with no down payment and close escrow in 21 days with no proof of income required. HUD needs to get back to the mission.
The other thing that the government needs to stop doing is talking about owner-occupied home equity as if it is money in the bank or a stock portfolio that can be used to buy things. Using your home equity like an ATM machine cost a lot of people their homes from 2008 to 2013. People that started 2004 with a mortgage balance of $200,000 and by 2007 owed $500,000, were in a heap of trouble when the value of the house dropped to $200,000 in 2009.
Homeownership does not create an income-producing asset for retirement nor does it produce a big free capital gain unless the person sells their free and clear $500,000 house they bought 30 years ago, and moves from California and buys a house in Tennessee or Texas for $250,000.
The key benefit of homeownership is a hedge against inflation in housing. Lots of Solano County seniors own their home free and clear and only pay for maintenance, taxes and insurance while others are renting at today’s prices. Many local seniors may owe $400,000 on their home at a 3.5% interest rate but have a lifetime monthly pension at five times their house payment of $2,500, and some still owe $400,000 on their house but have both a pension and a million dollars in IRAs.
Homeownership makes a person rich over time and rich is being 70 without any worries about having a place to live.
Jim Porter, NMLS No. 276412, is the branch manager of Solano Mortgage, NMLS No. 1515497, a division of American Pacific Mortgage Corporation, NMLS No. 1850, licensed in California by the Department of Financial Protection and Innovation under the CRMLA / Equal Housing Opportunity. Jim can be reached at 707-449-4777.
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