Most people know by now that if you plan to pay less than 20% down payment when buying a home, you'll be required to pay for Private Mortgage Insurance, or PMI. This insurance pays the lender in case you default, meaning you stop making mortgage payments. Since you have less "skin in the game" due to a lower down payment, the PMI offets that risk for the lender.
Not only do you have a slightly higher total monthly payment with the added PMI payment, as the borrower, you do not directly benefit from the mortgage insurance you are paying for, so it's understandable why many home buyers wish to avoid paying for this if possible. However, I would argue that for most people, paying for PMI is better than putting the full 20% down payment. Here are three reasons why PMI is actually a huge benefit to you:
1 – PMI Allows You to Buy Now Instead of Waiting For example, assume houses in your market are going up in value by 3% per year. If you buy a $200,000 house now, you save $6,000 vs. waiting a year. Plus, that $6,000 in house price appreciation becomes extra wealth that you’ve just created for yourself. PMI allows you to buy now and benefit from future house price increases.
2 – PMI Frees up Funds to Pay off Higher Interest Rate Debt For example, if you have credit card debt at 9% and mortgage rates are 4.5%, you may be better off putting less than 20% down. Instead, you could use a portion of your down payment funds to pay off the credit card debt. PMI allows you to do this.
3 – PMI Frees up Funds to Invest at a Higher Rate When you use funds for a large down payment, you are missing out on the opportunity to earn a rate of return on that cash. Is your rate of return on investments greater than the cost of a mortgage with PMI? If so, it may make sense for you to put less than 20% down, use a higher balance mortgage with PMI, and keep your funds invested.
Remember, at face value, PMI sounds like a bad move, but depending on your specific financial situation, PMI may be what's best. Contact me to learn more about how PMI applies to your situation.
PLEASE NOTE: This article is provided for illustrative purposes only. It is not an offer or commitment to lend you money, and it is not an advertisement for a specific mortgage or a specific interest rate.