The PMI Debate

I tossed the idea of PMI around a thousand times before settling on my current loan terms. PMI (Private Mortgage Insurance) is an additional expense tacked on to the mortgage payments if you have less than 20% down, which unfortunately means I’m looking at $111 a month until I have 20% ownership of my new home!

There were a few options, each with pros and cons, but it all comes down to one thing: cost. You can play with the numbers and timing, but at the end of the day, it’s still an extra expense.

So the question then is which levers are worth pulling. Here were my options:

1. Pay traditional PMI until I hit 20% equity

This is the standard plan. In my case, it would be an additional $111+ each month until I have 20% ownership of my new home. That adds up quickly, but then I get to remove it once I hit that threshold. My loan is still at the rate of 4.125%, but the monthly payments are higher until that 20% mark.

2. Bundle your PMI into your loan, indefinitely

Don’t do that. Don’t you ever do that! This is the reason I nixed two of the four lenders – they kept pushing the idea that they could lower my monthly payment by maybe $75, but only by raising my rate to 4.725%. Indefinitely.

This is a bad deal. You’re stuck paying a needless expense until/unless you refinance, which, if the rates are really lower than they’ll be again in a long time, I wouldn’t advise.

3. Pay your PMI up front

This can be a killer option, depending on your plan for repayment. My lender explained that he would be able to remove my monthly PMI payments of $111+ if I pay $5,322 up front at closing. If I were to follow the mortgage repayment plan, no additional payments added, this would save me a hefty chunk of change over the duration of my loan, so it sounds like the no-brainer.

That said, I wanted to make sure I wasn’t leaving money on the table by going either way.

***

Turns out that if I were going to follow the traditional payment plan, and not pay any excess towards the principle, that third option would save me about $3,400 over the course of 6+ years. Knowing me, though, I’m going to be more aggressive with my payments, and hit that 20% mark in about half that time.

So, of course, I got spreadsheet happy.

PMI Payment Calculator

Here’s a quick link to that calculator, in case you want to play with your numbers!

With this in mind, that $5,300+ up front cost only makes sense if I can’t put in more than $356.27 extra towards the principle, each month. If, however, I can put an extra $500 or more towards my principle, I’ll be saving money in the long run. So that’s my game plan.

I went with the 4.125% loan, including monthly PMI payments of $111. I’m confident I’ll hit that 20% before 4 years are up, and hopefully save myself a cool $2,000+ in the process!

Leave a Reply