For many homebuyers, putting 20% down on a home makes little financial sense, yet consumers resist using private mortgage insurance (PMI). Here are a few reasons why PMI can be a good move:
- PMI protects the lender and you. PMI protects the lender in case you default on your loan, allowing you to borrow enough to buy a home with as little as three percent down for a conventional loan.
- Interest rates are low. With rates in the low four percent range, the borrowing costs to buy a home are ridiculously low compared with car loans and other lines of credit.
- Using OPM is smart financial planning. Other people’s money is a great way to get into the game. Thanks to PMI, the bank’s insurer takes the risk. Twenty percent down on a $400K home is $80,000. Three percent down would be $12,000, which is a $68,000 difference.
- PMI can generally be removed. You can cancel PMI when your loan balance is paid down to 78 percent of the purchase price, or if your lender appraises the home to show an increase in market value great enough to eliminate PMI. Be sure to confirm that this sis the case on any loans you are considering.
- There are other reasons to love PMI. You’ll likely lose more in equity than it would take to save such a large down payment, at today’s sales pace. And it’s tax deductible.
That said, putting less money down is going to work for you only if you can afford the higher monthly payment, or you can choose a less expensive home. At least you’ll be in the game. Please consult your financial advisor before making any home-buying decisions.