Is PMI always a bad idea?

[Encinitas55]

I'm doing the math on purchasing a first home. We have enough to put 5% down which allows us to get a conventional mortgage instead of FHA. The benefit of this is that with conventional you can remove PMI at 80% (FHA just changed their rules for new mortgages this summer, you can't remove PMI).

I know that the "mustachian" wisdom is to put down 20%. At the rate we're saving we wouldn't have 20% until summer of 2015, so in two years. With interest rates low right now (approved for 4.5%) I'm wondering if it isn't better to just lock in the low rates. The math I did is that if rates are 6% or below in 2015 it's cheaper to wait for 20% but if it's above 6% then we would have been better off paying PMI. I know no one can predict what the rate will be but in April when we first met with a mortgage person it was 3.5% so rates have already jumped 1% in 4 months.

Is it worth it to wait? Plus we're paying rent each month, so while we wait to save we'd spend $25,000 in rent. Plus housing prices are on the rise and in San Diego we're seeing homes now $200-300k less than they were in 2007. 

[velocistar237]

PMI can make sense. In my case, we found an excellent buy that required moving fast, but if we had put down 20%, it would have taken all our savings. If I had lost my job or had a large expense right after closing, we could have lost the house, so we put down 10% and paid the rest after a few months. Also, if we had waited, we would have missed a tax credit.

In your case, it could be worth it, depending on the local market and the interest rates. How did you calculate the effective interest rate?

[Encinitas55]

Thank you! I only know two people that have recently bought a house (most of my peer are still renting) and they both put down 20%. But the more I look at it with housing and interest rates going up I'm leaning towards buying now.

I used this calculator: http://www.vertex42.com/Calculators/home-mortgage-calculator.html and hoped that is spit out the correct numbers!

[Dr.Vibrissae]

I can't really speak to your case, but we have PMI, even with it it is much cheaper to own than to rent in our area, so it makes sense for us.

[mustachianteacher]

I think it's worth it if you're buying in a market where prices are going up FAST. If it lets you get into a home that will appreciate handsomely and you plan on staying there long enough to profit and recoup the cost of your PMI, then I think it can even be smart.

That's pretty much what we did without realizing it. We bought our house in 2002 with 0% down. There was no penalty for 0% down beyond the PMI, so we hung onto our savings. Because prices were going up fast, we were able to refinance after about 2 years with 20% equity, and we got rid of the PMI. I realize it's also a perfect example of everything that was wrong with the housing market, but we're still here 12 years later (we're very likely to stay here forever), and it worked out well for us.

[MelodysMustache]

I think it's worth it if you're buying in a market where prices are going up FAST. If it lets you get into a home that will appreciate handsomely and you plan on staying there long enough to profit and recoup the cost of your PMI, then I think it can even be smart.

That's pretty much what we did without realizing it. We bought our house in 2002 with 0% down. There was no penalty for 0% down beyond the PMI, so we hung onto our savings. Because prices were going up fast, we were able to refinance after about 2 years with 20% equity, and we got rid of the PMI. I realize it's also a perfect example of everything that was wrong with the housing market, but we're still here 12 years later (we're very likely to stay here forever), and it worked out well for us.

I agree and I did this too.  Bought my house 18 months ago just as the market was starting to heat up in my area.  I refinanced one year later (to reduce the term and rate) and the value had increased so much that PMI was no longer required.

It can be done, and it can be smart.  But you have to know your local market well and understand the risks.

[Zamboni]

FHA just changed their rules for new mortgages this summer, you can't remove PMI

That's annoying, but I suppose they did that for a reason.

[olivia]

I've been wondering the same thing.  I think I'll have about 10-15% down for a house by the time we need to move out, but due to the timing of our lease end, I don't think we'll get to 20% unless some stock I have really takes off, which of course I'm not banking on.  I'm sure we could likely get to 20% quickly by sending in extra payments to principle, but I'm wondering how soon a bank is willing to remove PMI?  Or if a full refinance would be necessary?

[Michelle119]

We pay PMI on our mortgage. It made a whole lot more sense to do that with 5% down than to wait and save up 20% and pay rent during that time period. We also got a decent deal last April and were able to refinance last fall to a lower rate (3.375%) and the appraised value of our house went up so we were able to jump to 10% equity at the refinance.

[Zamboni]

Imho, if you can buy for much cheaper monthly payment than renting, then PMI is fine if that is the price for becoming a homeowner years earlier.

I'm sure we could likely get to 20% quickly by sending in extra payments to principle, but I'm wondering how soon a bank is willing to remove PMI?

Probably best to just ask the local lender or real estate attorney about this.  My bank had a one year minimum before they would remove PMI.  They were required by law (not sure if it's state or federal) to remove it at 78% loan to value, and I requested it promptly at 80%, but the value was the purchase price of the home rather than an appraised value.  So appreciation of the home value didn't really change the timing of PMI removal.  I've heard that it can in some cases, but it didn't in my case. 

[Mr Mark]

If you can -  depends on state -  pick you own title company, not the one recommended or bundled with the mortgage.

Then, is the PMI paid monthly, or as a lump sum payment up front that's just added to the mortgage?

Former is fine if required. Latter is always a bad idea.

[MelodysMustache]

Then, is the PMI paid monthly, or as a lump sum payment up front that's just added to the mortgage?

Former is fine if required. Latter is always a bad idea.

A third option (which I did) is to pay the PMI up front at closing.

[Michelle119]

I'm sure we could likely get to 20% quickly by sending in extra payments to principle, but I'm wondering how soon a bank is willing to remove PMI?  Or if a full refinance would be necessary?

We are able to either a) wait until the loan to value ratio is 80% of the original appraised value, b) get an appraisal earlier if we think the market is up, or c) full refinance. If we chose option a or b our loan documents said we were required to pay PMI for at least 18 months. We did not pay any up front, just monthly. The market is up in our area and we are still waiting to hit 18 months, when we hit that we will probably pay for an appraisal to get rid of PMI.

[olivia]

I'm sure we could likely get to 20% quickly by sending in extra payments to principle, but I'm wondering how soon a bank is willing to remove PMI?  Or if a full refinance would be necessary?

We are able to either a) wait until the loan to value ratio is 80% of the original appraised value, b) get an appraisal earlier if we think the market is up, or c) full refinance. If we chose option a or b our loan documents said we were required to pay PMI for at least 18 months. We did not pay any up front, just monthly. The market is up in our area and we are still waiting to hit 18 months, when we hit that we will probably pay for an appraisal to get rid of PMI.

Makes sense, thank you! I still need to talk to a lender and will ask them their bank's specifics. We won't buy for at least 9 more months so I haven't done much legwork yet.

[NumberCruncher]

I think it's worth it if you're buying in a market where prices are going up FAST. If it lets you get into a home that will appreciate handsomely and you plan on staying there long enough to profit and recoup the cost of your PMI, then I think it can even be smart.

That's pretty much what we did without realizing it. We bought our house in 2002 with 0% down. There was no penalty for 0% down beyond the PMI, so we hung onto our savings. Because prices were going up fast, we were able to refinance after about 2 years with 20% equity, and we got rid of the PMI. I realize it's also a perfect example of everything that was wrong with the housing market, but we're still here 12 years later (we're very likely to stay here forever), and it worked out well for us.

Ummm...isn't this a bit of a "timing the market" issue, though? I'm sure people who bought at the peak of the housing bubble had the same thoughts. Unless you've got a magical crystal ball, there's always going to be risk.

[Villanelle]

I think it's worth it if you're buying in a market where prices are going up FAST. If it lets you get into a home that will appreciate handsomely and you plan on staying there long enough to profit and recoup the cost of your PMI, then I think it can even be smart.

That's pretty much what we did without realizing it. We bought our house in 2002 with 0% down. There was no penalty for 0% down beyond the PMI, so we hung onto our savings. Because prices were going up fast, we were able to refinance after about 2 years with 20% equity, and we got rid of the PMI. I realize it's also a perfect example of everything that was wrong with the housing market, but we're still here 12 years later (we're very likely to stay here forever), and it worked out well for us.

Ummm...isn't this a bit of a "timing the market" issue, though? I'm sure people who bought at the peak of the housing bubble had the same thoughts. Unless you've got a magical crystal ball, there's always going to be risk.

I have to agree with this.  Prices going up fast now doesn't mean they will continue to do so. 

If someone came on here and said that they were considering buying a new (to them) car with a loan because they found a good deal and wanted to jump on it, rather than wait another 18 months until they could buy a car outright, they'd get face punches.  That's not much different than wanting to buy a house with very little down payment, necessitating PMI.  Prices may continue to go way up, but they might level off or drop.  You have no idea which of those things will occur, so it's best to just remove them from the equation entirely.  And without that in the picture, would you consider paying an extra fee to buy now, instead of waiting two years to get to a point where you can make the same purchase, but without the extra fee?

Also, from friends who've gone through it, it sounds like getting rid of PMI is not as easy as it may sound.  And of course it isn't.  They are getting free money from you and want to make it cumbersome and time consuming for you to turn off that money tap. 

[AlanStache]

I recently had to do similar math to see where I would be after 1 and 5 years, was very surprising how different the scenarios turned out.  Very clear cut what the best financial decision was.

You need to calculate where you will be in 5 years for a few different paths, and include rent, PMI payment, equity, mortgage payments and do this for a few different interest rates.  It will take a good evening to run all the numbers but the answer will probably be clear.

I would run these cases for 5 years out
1) buy now:  4.5% w/ PMI, but you get equity for 5 years, zero rent and deduct interest payments.
2) buy in 2 years: 4.5% w/o PMI, include 2 years rent, 3 years equity growth, and deduct interest payments.
3) buy in 2 years: 6.5% w/o PMI, include 2 years rent, 3 years equity growth, and deduct interest payments.

I would guess case #1 will come out the best but you need to plug in your own numbers.

[Cromacster]

Not sure if this will work for everyone, but here is what I did when I purchased my home a year ago.

We were in the situation where the market was basically bottom, and interest rates were low.  So it was the right time to buy.  We had enough for 20% down but it would have wiped us out after all of the fee's etc... that you have when buying a house.

We decided to put 10% down.  But we were given the option to pay the PMI upfront.  The PMI came out to 1% of the mortgage amount.  I had the analysis at one point, but we came out ahead when comparing the payments until we reached 20%.

So if you are in a situation where you might end up with PMI, investigate if this is an option for you.

[sdeng87]

Slightly off topic, but my own numbers have led me to believe that buying in San Diego county no longer makes sense. Especially if it takes you two years to save up 15% of the purchase price. My 2 cents.

Also, I'm not sure what property you're looking at but property taxes here and HOA along can greatly exceed rent. I was looking to buy, but now I've downsized to a $600/mo room and am just socking away with >70% savings rate and looking to move from this county in a few years.

I apologize if my assumptions are way off. Good luck.

[gotaholen1]

If you do decide to go the route of PMI, make sure to shop around for the loan and read the terms in regards to canceling the PMI.  If you can get a conventional mortgage with PMI, many banks will let you cancel the PMI without a refinance.  I remember some loans that would automatically cancel the PMI after an equity state of 22 percent was reached.  Also may say that you need to have an appraisal done to cancel the PMI. 

As far as market conditions, if everyone else is rushing out to buy a house in your market that does not necessarily make it a good idea.  I would say typical mustachian wisdom would typically advise to be very cautious when doing what everyone else is doing in regards to purchasing :).  Don't be fooled by the "Purchasing Power" jargon that gets thrown around my lenders and real estate agents.... and also read this article by JLCollins http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/