First Time Buyers - What you Need to Know about PMI (Private Mortgage Insurance)
Like so many subjects that get talked about in the news, there is so much information it's difficut to even wade through it. It can be scary and confusing. "Is this a bad time to buy?' "Maybe prices will cool down if I just wait." "How do I come up with 20% for a downpayment?"
First, let's put this myth to bed once and for all... you do not need a downpayment of 20%. You don't. "But what about PMI?" So what. PMI. We should all look at PMI, sometimes MIP interchageably, as a something to be grateful of it's existance, not talk about it like it's a toxic nighmare. Where did this come from? I'm here to say, "Thanks PMI. Cheers!"
My wife and I bought a house for our family in 2011. We did a down payment of about 3% of the purchase price. That's all we could do. If we had to save up for 20% of the $160k, we'd probably still be working on it. (Teacher salaries) We did pay around $90 per month for PMI, and in some years the tax code allowed PMI as a deduction. We could afford it, especially as we had a pretty good rate of around 5%. You read that right... 5% was, and is a pretty good rate. Don't hold your breath that we'll ever see the 2.9% rates ever again. If we do, it will likely be accompanied by some global economic catastrophe. (see years 2008 - 2013)
That house is worth around $350k now. We moved two years ago, but kept the home as a rental property. We might just see year 30 of our 30-year note. But who knows...we have options. We have options we may not have otherwise had if we rented for an extra five or ten years while we struggled to amass a nut of $32,000 in cash, and home values continued to rise for the next 15 years. Here's the other thing - and this depends on the type of loan - FHA or Conventional. Presently, MIP on an FHA loan remains for the life of the loan. Solution: Once you build up some equity, you go and refinance to a conventional loan, where the mortgage insurance drops off when you have established equity of around 22% of the value of the home or the amout your paid origianlly.
Here's the takeaway: Everyone's situation is different. Buying a home isn't right for everyone all the time. If buying a home is your goal, buying sooner is probably better than later. Time is your friend in real estate. Don't wait around on the sideline while prices continue to rise. It's true the market can fluctuate, but over the long term, it goes up. I had buyer clients in the early 2020's who opted to "wait for the market to come back down". Getting back in three to five years later was no easier, and they missed out on building equity.
Don't be afraid of PMI, it can help you achieve your home-buying goal. It can be your friend.
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