Avoid PMI with a Down Payment

Regarding PMI, is it always wise to pay 20% down to avoid paying this?

1 Answer

Well in regards to the PMI only, if you can avoid (paying PMI) it then that is a good thing. Also you may get a lower rate on your mortgage, especially in this market with 20% down.

The real math starts when you look at your overall financial picture, and factor in whether or not your PMI is going to be tax deductable. It is also a good idea to factor in reserve assets (cash in bank) when deciding how much money to part with and when.

So assuming you have 6 months of mortgage payments left over after 20% down and closing costs, then it might make sense. It also depends on how much house you are buying compared to your income.

Some other factors are the opportunity costs. This is the amount of money your 20% would earn if you left it where it was or invested it differently.

If you look on a chart and take the payment (including PMI) on 5% down and subtracted the lower payment (after 20% down) and paid it into an account starting from 0.00 and compared it to the 15% down you invested that sat for the same period of time, you will usually get a higher return on the 15% that started on day one.

What we try to do for people is educate them about loan products so they can put 5% down and have a payment closer to the 20% down (but still retain safety.) Then we illustrate how adding the savings monthly to the 15% out performs the 20% down scenario.

So as you can see, a simple yes or no to this question simply would not do. Depending on your situation the results of how you buy your home can be the difference of hundreds of thousands of real dollars (for you) over the next 30 years.

I hope that helps!