Many people cringe when they hear the phrase private mortgage insurance. The first thing they think of is how they wish they could be allocating that money to something else.
But what if PMI was a good thing? Here are a few ways that it can be.
PMI is Good if it Lets You Get a Great Mortgage Rate
Let’s say you want to buy a $200,000 house. To save up the 20% required for a down payment, you’d need to save $40,000. Otherwise, you’ll need to pay private mortgage insurance.
Which option makes sense? Well, it depends. One thing it depends on is the current mortgage rate. For example, let’s say rates were at record lows (such as they are right now.)
In that case, it might make sense to buy now even though you’ll need to pay PMI. If you wait a few years until you can save up $40,000, who knows what will happen in the market. Even though rates may still be this low, it’s very unlikely. Rates will probably go up, meaning it becomes more expensive to buy a house.
So essentially – it might make sense to buy now and pay PMI if you can get a great mortgage rate.
PMI is a Good Thing if it Gets You Home Value Appreciation
Let’s think about this another way. It’s similar, but not quite the same situation we just talked about.
Homes appreciate by about 3.8% each year, whereas PMI is only 0.5-2% per year. For simplicity sake, let’s say your PMI is 1%.
If you buy the house now and pay PMI, there’s still roughly a 2.8% difference (3.8% vs 1%.) So the value of your home is growing more than the amount of PMI you pay out each year.
Is this an exact science? No, for several reasons.
- Your home probably won’t rise by exactly 3.8% per year
- The value of the home isn’t liquid, whereas the cash you pay towards PMI is
- Most people hate losing/spending money more than we like making the same amount
But the numbers don’t lie. And in a hot market, it makes even more sense. So if your PMI is 1% and home values grow by 10%, you just outpaced PMI by 9%. That is a lot of money.
Bottom line – if real estate values are rising, it may make sense to pay PMI and buy right now to get appreciation on the home.
PMI is Good Because it Encourages Saving Money
This last point goes in a different direction. Let’s say you really don’t want to pay PMI, even in a rising market. But you do really want to buy a house, so your only option is to save up for a down payment.
Anything that encourages you to save money is a good thing. In today’s turbulent economy, most of us should be putting more money away.
Plus, there is one big advantage you get from saving up a 20% down payment on a home. Your monthly payment will be lower, giving you some breathing room with your bills. That’s something everyone can get excited about!
Is PMI a good thing? It depends on how you look at it. But it can be something worth paying if it helps you save money or earn real estate appreciation in the long run.
To see if it makes sense to you, send me an email at firstname.lastname@example.org and I’ll help you figure it out.