What is your real estate cash conservation policy?
Cash Conservation at Closing
Like most people..
Like most people, you don’t have a cash conservation policy when it comes to your real estate closing. In addition, most people have never heard the term. So – what does this mean? Basically, a good rule in real estate is to use OPM. Huh? That’s Other People’s Money. And there are a few ways to use OPM.
This is a simple way to conserve your cash at closing. Let’s say you come to an agreement to purchase a property at $400,000. We then say to the seller “we’ll give you $405,000 but you will pay $5000 of our closing costs.” Most sellers will say yes, since they still get the $400K. But you will then be adding $5000 to your mortgage, at 4.5% interest over 30 years, that will add $25.33 onto your mortgage. In 17+ years you will have spent $5000 on your mortgage payment. However, if you’re like most people, you’ll move well before 17 years have passed.
Private Mortgage Insurance (PMI)
If you’re paying less than 20% down payment on a home, you’ll need to buy PMI. This protects the lender in case you default. That’s right – you pay insurance to benefit the lender. But, you don’t have a choice.
PMI will cost a lot, typically around 0.5% to 1% of the entire loan amount. On a $400,000 mortgage, you’ll probably pay $100 per month – or more.
How can you avoid paying PMI? The simple way is to put down at least 20% cash. But – what if your piggy bank is empty? If that’s the case, you’ll have to pay it. And that’s not necessarily a bad thing, if it gets you into your new home. And, you’re still using OPM.
You can save and pay down the mortgage balance. However, that doesn’t conserve your cash. And that’s what we’re talking about today. However, when your mortgage payments have brought the balance to 80% or less of the home value, you can get the PMI removed. Or if the home’s value has increased to a similar value.