The Dream Home: PMI = a Starbucks a Day
With all the young homeowners jumping into the market to get their $8000 in Obama cash (which is just driving up the cost of a house $8K-16K, but that is another matter), I have gotten a number of questions about what the right size for a down payment is and what costs are involved.
We have a great analysis of what the tradeoffs are for different downpayment percentages in “The Dream Home (or Condo): Saving for a Down Payment” from our Dream Home series.
Many of the questions though, are specifically around PMI or Private Mortgage Insurance. If you have a loan with less than 20% down, in most cases a 5% or 10% down loan, you are required to pay PMI. In most cases it will run you from $90-120 or more a month depending on the size of your loan.
Most people, when considering such a big purchase, think of the monthly PMI payments as peanuts, insignificant. When it comes to cash flow though, it’s far more than peanuts. Here are a few cost comparisons for $120 in PMI per month:
One Starbucks Specialty Coffee a Day ($4)
A Movie Out and Popcorn for 2 a Week ($28)
iPhone service and 20 Songs a Month ($120)
A basic 42″ Plasma TV a Year ($1440)
Depending on the cost of the house and your down payment and whether you pay extra principle, you could be paying it for approximately 8 years, or $11,520 total!
I am not saying it may not be worth it but, it is always helpful when making any purchase to put things in comparative terms when you are budgeting. Have you had any experiences with PMI? Please share your thoughts in the comments!
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One option is to just get another mortgage to cover the additional cost. I did this by putting 10% down and getting a loan for the additional 10%. I avoided PMI and was able to put that money towards my home. The payment was close to the same but it wasn’t “insurance”.
I personally would rather invest the other 16.5% and make some interest on it rather than let it sit as equity doing nothing for your wealth. That 16.5% in 8 years will more than make up for the PMI you payed.
^All that, assuming FHA mortgage (3.5% downpayment)
I love living in a low cost of living area. I bought (for 80k, the minimum for the credit) a three bed, 2 bath home in a really cute area of town with a busline straight into work. At 3.5% down, my PMI is $1/day. The way things work in this town, my entire mortgage+PMI+home insurance+taxes+lawn/cleaning service is still $100 less than a nice 2 bedroom apartment, so it’s worth it to take out PMI.