Mortgage Insurance Offers Flexibility to Step-Up Buyers
January 8, 2016 / Amy Butler, Regional Vice President—Heartland Region
One of the best aspects to owning a home is the opportunity to build equity and benefit when real estate values rise. When it comes time to move to a new home, mortgage insurance can provide flexibility and freedom, even for buyers who earn a profit on the sale of their previous home.
While some home sellers direct all of the profits from a previous home sale into their new home, that’s not the wisest financial scenario for every individual or family. Lenders generally require a down payment of 20 percent of a home’s sale price when the purchase is not supported by mortgage insurance. The median price for existing homes across the nation is now $217,600—which translates into a 20 percent down payment of $43,520—and that number can be much larger in areas of the Northeast and California where “average” home prices can be $1 million or more.
The reasons a buyer might prefer to use mortgage insurance even after “cashing out” with a substantial profit vary, but it all comes down to having more options at closing, including the ability to make the down payment that’s right for the purchaser’s circumstances.
Paying off existing debt and avoiding taking on new credit card debt
For many buyers, it is better pay cash for items like a refrigerator, carpets, or furniture instead of taking on store credit at interest rates that average 23.23 percent, according to a CreditCards.com survey. Other home sellers may prefer to use cash proceeds from the sale to pay off existing debts, especially accounts with higher interest rates.
It can also be very beneficial to set aside funds for energy-saving projects that can pay for themselves very quickly. For example, energy-efficient windows, “smart” thermostats, and attic insulation can substantially cut heating and cooling costs.Saving money AND avoiding new debt
Buyers can save a lot of money by choosing a “fixer-upper” over a move-in ready house, but many purchasers of older homes will need to set aside money for renovations. As an example, consumers report that a kitchen remodel costs an average $20,079—so it’s important to avoid the trap of needing to use credit cards or a building supply store’s revolving credit to complete a large project. In my experience, building projects always wind up costing more than the initial estimate.
Bank the money for an emergency
Finally, many experts advise families to keep enough cash in savings to cover three to six months of expenses—to provide a solid cushion in the event of an unexpected illness or job loss.
So, keep a home seller’s situation in mind as you help them plan for closing. It may make perfect sense for some to let mortgage insurance provide a level of flexibility to their next home purchase. In many cases, that flexibility can be as important for a step-up buyer as it is for a family purchasing their first home.
Amy Butler Regional Vice President of United Guaranty’s Heartland Region. Butler joined United Guaranty in 2001 and has progressed through the organization from Customer Service to Sales. Most recently, she was Vice President of Strategic Accounts.
Butler has been the President of the Atlanta Mortgage Bankers Association, earned many Associate of the Year awards, and recently earned the Accredited Mortgage Professional (AMP) designation. United Guaranty’s Heartland Region includes Illinois, Indiana, Michigan, Minnesota, Iowa, Nebraska, North Dakota, South Dakota, and Wisconsin.
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