PMI (Private Mortgage Insurance)

PMI stands for Private Mortgage Insurance. It's a monthly cost added to your mortgage payment when you put less than 20% down on a conventional loan. PMI doesn't protect you as the buyer; it protects the lender in case you default on the loan.

PMI typically costs between 0.5% and 1.5% of the loan amount per year, though rates vary based on your credit score and loan details. On a $300,000 loan, that might be $125 to $375 per month added to your payment.

The good news: PMI isn't permanent. On conventional loans, you can request PMI removal once your loan balance reaches 80% of the original purchase price.

PMI adds to your monthly housing cost, which affects your budget and affordability calculations. Understanding PMI helps you weigh the tradeoffs: putting less down (and paying PMI) versus saving longer for 20% down and avoiding it altogether.

In many cases, buying sooner with PMI makes financial sense, especially if home prices are rising. Waiting to save 20% while prices increase could cost more than the PMI would have.

A buyer puts 5% down on a $325,000 home, borrowing $308,750. Their PMI rate is 0.9%, adding $231/month to their payment. Three years later, their loan balance has dropped to $290,000 and the home has appreciated to $355,000, giving them over 20% equity. They contact their lender and have PMI removed, saving $231/month.

"PMI is wasted money."

PMI enables homeownership sooner than waiting to save 20% down. If home prices are rising, the appreciation gained by buying now rather than waiting can far exceed the total PMI cost. Whether PMI is "worth it" depends on your specific situation and market conditions, not a blanket rule.