I was once a first-time home buyer, and vividly remember asking what was PMI and why do I have to pay extra? In this video, I not only define PMI, but I explain why it can actually help a homeowner build wealth.

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Transcript

I was once a first-time home buyer, and remember how daunting it was to save for a down payment for our first home. And thankfully, we didn’t have to save 20% 

Thanks to loan options like FHA loans, VA loans, and many conventional loans that allow buyers to put down as little as 3% down, we were able to get into our first home.

I also remember going over the loan documents and asking, “What is PMI?”

When you don’t have a 20% downpayment, lenders will charge an additional monthly fee for an insurance policy that protects the lender if you cannot pay your mortgage. This is called Private Mortgage Insurance, or PMI.

The monthly cost of your PMI depends on the home’s value, the amount of your down payment, and your credit score.

You know I love tables, charts and data, so here is a table showing the difference in monthly mortgage payment for a $450,000 home with a 3% down payment and PMI vs. a 20% down payment without PMI.

The first thing you see when looking at the table is no doubt the added $211 a month that you would be spending on your monthly mortgage cost. The second thing that should stand out is that a 20% down payment is $90,000!

If you are buying your first home, $90,000 is a large sum of money that takes discipline and sacrifice to save. Most likely you’re in your early thirties and you haven’t quite made that executive level paycheck and so saving $90,000 is really hard.

If you decided that you did want to save this 90 grand, you would have to put away $750 per month for 10 years… 10 years to save $90,000!

A lot could happen in the market while you’re waiting to save for a higher down payment. It most certainly means higher home prices in the future, which could make it tougher to qualify down the road.

On the other hand, if you save that same $750 a month, you could afford a 3% down payment in about a year and a half, and that sounds a whole lot more attainable than 10 years and $90,000.

The third thing I should point out is a 3-bedroom apartment in the area rents for about $2,600 or more! You could actually save money every month if you buy vs. rent in-town.

If the prospect of having to pay PMI is holding you back from buying a home today, consider this: 

Based on results of the most recent Home Price Expectation Survey, a homeowner who purchased a $450,000 home in January 2019 would gain $51,000 in equity over the next five years based on home price appreciation alone.

While PMI is an added cost, you’ll begin building equity, which is wealth, vs. waiting 10 years to save enough for a 20% down payment.

And yes, you can buy a home for $450,000 in town. If you don’t believe me, give me a call.

Another great thing about PMI is that once you have 20% equity in the home, you can cancel that extra payment.

So, in just home equity appreciation alone, you expect to gain about $51,000 in equity. If you start to make extra payments on that principle, you could conceivably cancel your PMI payment in seven to eight years.

So again, private mortgage insurance is an added cost if you were to put less than 20% down on your home loan, but there are many benefits to getting into a home today versus waiting 10 years to save a down payment.

If you have any questions about how that might turn out for you, give me a call. I’m happy to run that kind of information over with you. You can also reach out to a mortgage broker in your area and they can discuss with you your options just so you can weigh the pros and cons.

I hope you found this information helpful. Please subscribe below. I would really appreciate it and I look forward to seeing you in the next video.

Best,

Michelle