On This Financial Life episode, the guys chat with Brian, a long time fan of the show. They talk about his finances, mortgage, and debt over a cold one.
Here’s the scoop. He and his wife are new first-time home buyers and live in the Philly area. They didn’t have the best living situation, so it pushed them to aggressively to save for a home and drastically cut spending. They didn’t have the easiest time of finding a home.
The first house they put a bid on majorly failed the inspection and they were looking at 10-20k worth of repairs. No bueno. They finally ended up finding a place they loved, but the price was a lot higher. After doing the math, they decided they could afford the house and used an FHA loan to pay for it.
This only required them to put 3.5% down. Unfortunately, putting under 20% down on a home comes with private mortgage insurance or PMI. For Brian, this increased the cost of his home by 14% per month. He and his wife are looking at putting in 62K more towards principle before they reach the 20% they need to get rid of the PMI.
Mortgage aside, they are scheduled to have all their other debts paid off by 2019, and recently celebrated their biggest financial milestone by completely paying off their largest and highest APR credit card bill.
They make a decent combined 100k+ of yearly income and also find ways other ways to bring in extra cash on the side. His wife does some babysitting and Brian does some freelance writing for a pharmacy magazines. In a nutshell, this is what their monthly finances looks like right now.
Student loans: $600
Mortgage, PMI, taxes: $2,200
Other credit and car loans: $1,000
This leaves them with about $3,000 left over at the end of the month. So what should they do with this extra cash? Thomas and Andrew suggest taking the extra cash and paying off that credit card debt. Paying the minimum is costing them about $300 per month in interest. If they focused on it, they can crush that debt pretty quickly.
Once they pay off the credit card, in 2-3 months, the can start paying more towards their mortgage. The PMI costs them $250 per month, so that is the next biggest debt focus on. Brian should talk to his bank about making extra payments and see if he can direct them towards paying down the principle and refinance.
With an FHA loan, the PMI never goes away. In January 2013, the FHA changed its MIP guidelines to be for the life of the loan. Any current FHA loan with the minimum down payment (3.5%) will have MIP for the life of the loan even after you hit 20% equity.
Unless he refinances, he’s paying that insurance indefinitely, if I’ve understood it correctly. FHA loans generally suck pretty bad unless you’re in some kind of unique situation, but most of the time, like in this case, they’re for people who are eager to get in a house sooner and either don’t have enough of a downpayment or have poor credit.