E198: PMI Is a Privilege

If you’ve talked to a Boomer about buying a house, it’s likely that they’ve given you some bogus advice: “Don’t pay for private mortgage insurance! It’s a scam!” Well, David is here to tell you that they’re just WRONG. You should definitely not avoid PMI because, as a Gen Zer or Millennial in this economy, it could save your bacon. 

Here are some power takeaways from today’s conversation:

• Why grandpa and grandma are wrong about PMI
• What is PMI and how does it work?
• The benefits of using PMI
• Why it pays off in the long run

Episode Highlights:

[05:27] What Is PMI?

Now that rents are going up and up and up, the old-timey math that makes Boomers think that PMI is not important is no longer relevant. Yep, these Boomers are out-of-date with their real estate knowledge and this is one situation where you should ignore Grandma’s advice. PMI, or private mortgage insurance (can also be known as MI), is a monthly fee that you pay on top of your PITI that makes up your monthly payment. This is required if you paid less than 20% down on your home. It’s an insurance policy that’s for the bank, not for you. That’s because they want to be assured that if you don’t pay the loan, the house goes back to the bank and they have less of a chance of losing money. So, you are paying extra, which sucks. But when you look hard at the math, are you really paying extra?

[13:49] Paying PMI Isn’t Forever

Now, here’s what the Boomers don’t tell you: you don’t pay on PMI every month forever until your house is paid off. No! Instead, you only pay until you’ve paid past that magic 20% mark. So, eventually, you won’t be paying it all. Also, remember that because you’re paying off some of the interest and the principal each month, your equity position grows stronger each month. So, it’s a temporary extra payment that you pay because you earned the privilege of being in a position where people trusted you with their money to buy a home and so you don’t have to throw $2,000 away on rent. 

[22:24] The Benefits of PMI

Not all loans require you to pay a PMI, but most do. So, you need to factor in $75 a month for a brief period of time. But, only $75 a month to be able to afford even more home faster? Sounds like a win. So, if you pay 10% down on a $400,000 home, you have to save $40,000. If you save $1112 a month, it would take you three years to save that amount. That’s quite a chunk of change and this is all while you’re still paying rent! So you’re avoiding $75 a month because you don’t want to pay a PMI, then you are saving $1112 while also paying $2000 in rent. That’s a lot of money.