Many mortgage loan programs today allow homebuyers to use less than a 20% down payment when buying a house. When you do this, you are often required to pay Private Mortgage Insurance (PMI). This increases your mortgage payment slightly. Here are three reasons why PMI is actually a huge benefit to you:
1 – PMI Allows You to Buy Now Instead of Waiting
For example, assume houses in your market are going up in value by 3% per year. If you buy a $200,000 house now, you save $6,000 vs. waiting a year. Plus, that $6,000 in house price appreciation becomes extra wealth that you’ve just created for yourself. PMI allows you to buy now and benefit from future house price increases.
2 – PMI Frees up Funds to Pay off Higher Interest Rate Debt
For example, if you have credit card debt at 9% and mortgage rates are 4.5%, you may be better off putting less than 20% down. Instead, you could use a portion of your down payment funds to pay off the credit card debt. PMI allows you to do this.
3 – PMI Frees up Funds to Invest at a Higher Rate
When you use money for a large down payment, you are missing out on the opportunity to earn a rate of return on that cash. Is your rate of return on investments greater than the cost of a mortgage with PMI? If so, it may make sense for you to put less than 20% down, use a higher balance mortgage with PMI, and keep your funds invested.
PLEASE NOTE: This article is provided for illustrative purposes only. It is not an offer or commitment to lend you money, and it is not an advertisement for a specific mortgage or a specific interest rate. Contact me to run the numbers for your situation.