Everyone says avoid PMI at all costs. They’re wrong.
If you’ve spent any time researching home buying, you’ve heard it a thousand times: “Never pay PMI.” “Save up 20% down.” “Don’t throw money away on private mortgage insurance.”
This advice sounds smart. It feels responsible. And for most people, it’s costing them tens of thousands of dollars. I’m going to show you the math that personal finance gurus conveniently ignore and why paying PMI might be one of the smartest financial decisions you ever make.
What Is PMI, Anyway?
Before we dive into the controversy, let’s establish the basics.
Private Mortgage Insurance (PMI) is what conventional lenders require when you put down less than 20% on a home purchase. It protects the lender (not you) if you default on the loan.
Here’s what it typically costs:
- Annual rate: 0.5% to 1% of your loan amount
- Monthly cost: $150 to $300 for most conventional loans
- Duration: Until you reach 20% equity in your home
For example, if you buy a $400,000 house with 10% down ($40,000), you’ll have a $360,000 loan. At a 0.7% PMI rate, that’s $2,520 per year, or $210 per month.
That’s real money. Money that doesn’t build equity, reduce your principal, or provide any direct benefit to you.
So the conventional wisdom makes sense, right? Just save up that full 20% down payment and skip PMI entirely.
Not so fast.
The $80,000 Mistake: The Real Cost of Waiting
Let’s run through a real-world scenario that plays out every single day across America.
Scenario: You’re Ready to Buy (Almost)
You’ve saved $40,000, enough for 10% down on a $400,000 home. But everywhere you look, you’re told to wait. Save up to $80,000 so you can put 20% down and avoid PMI.
You’re disciplined. Let’s say you can save $2,000 per month. That means you need 20 more months, almost two years, to accumulate that additional $40,000.
Sounds reasonable. But let’s look at what actually happens.
Path A: Wait and Save (The “Smart” Approach)
What you’ll pay over 20 months:
- Rent: $2,200/month × 20 months = $44,000
- (Plus utilities, renter’s insurance, etc.)
What happens to home prices: Home prices historically appreciate 4-5% annually. Let’s use a conservative 4% for this example.
After 20 months (1.67 years), that $400,000 house is now worth approximately $427,000.
Your position after 20 months:
- Saved: $80,000 total
- Spent on rent: $44,000
- Home price: $427,000
- Down payment needed (20%): $85,400
- You’re still $5,400 short of 20% down
Path B: Buy Now with PMI (The “Risky” Approach)
What you’ll pay over 20 months:
- PMI: $210/month × 20 months = $4,200
- Building equity through principal payments: ~$10,000
- Home appreciation: $27,000
Your position after 20 months:
- Home value: $427,000
- Loan balance: ~$350,000
- Equity: $77,000
- PMI paid: $4,200
The Shocking Truth: Path B Wins by $75,000+
Let’s break down the actual financial impact:
Path A (waiting) cost you:
- $44,000 in rent payments (gone forever)
- $27,000 in lost appreciation (you don’t own the home gaining value)
- Total opportunity cost: $71,000
Path B (buying with PMI) cost you:
- $4,200 in PMI payments
- But you gained $37,000 in equity and appreciation
- Net position: +$32,800
The difference between these paths: Over $100,000 in total financial impact.
And here’s the kicker: after those 20 months, you’re approaching 20% equity anyway. You can request PMI removal and stop paying it altogether.
The Factors That Make This Even More Extreme
The example above uses conservative numbers. But several factors can make the case for PMI even stronger:
1. Higher Appreciation Rates
In growing markets, appreciation often exceeds 6-8% annually. If you’re in Austin, Boise, or Charlotte, that $400,000 house might be $450,000+ in two years.
I’ve watched countless potential buyers in 2020-2021 “wait to save more” only to be completely priced out by 2023 when prices jumped 30-40% in some markets.
2. Interest Rate Changes
Imagine you’re deciding in early 2021 when rates were at 3%. You could:
- Buy now with PMI at 3% interest
- Wait two years and buy at 7% interest without PMI
The person who “wasted money” on PMI is saving hundreds per month in interest compared to the person who waited for the “perfect” scenario.
3. Rent Increases
We used $2,200/month rent in our example. But rent doesn’t stay flat. If your rent increases by just 5% per year, you’re paying even more while waiting.
4. The Quality of Life Factor
This one’s impossible to quantify, but it’s real:
- Living in your own home vs. renting
- Stability for your family
- Freedom to renovate, decorate, and truly make it yours
- Not worrying about landlords, lease renewals, or sudden rent hikes
- Building roots in a community
How much is that worth to you over two years?
When You SHOULD Avoid PMI
I’m not arguing that PMI is always the right choice. There are legitimate scenarios where waiting makes sense:
1. Flat or Declining Markets
If your local market shows no appreciation (or prices are falling), the math changes completely. Without appreciation working in your favor, waiting to save more becomes more attractive.
2. You’re Already Close to 20%
If you have 17% saved and can reach 20% in 3-4 months, just wait. The minor delay won’t significantly impact you, and you’ll save on PMI from day one.
3. PMI Would Overextend Your Budget
If adding $200-300/month in PMI makes your housing payment uncomfortably tight, you might not be financially ready to buy yet. Never sacrifice your emergency fund or financial stability.
4. High-Interest Debt
If you’re carrying credit card balances at 18-22% interest, pay those off first. The guaranteed “return” of eliminating high-interest debt beats the potential benefits of home appreciation.
5. Insufficient Emergency Fund
You need 3-6 months of expenses saved after your down payment and closing costs. Don’t deplete your safety net just to buy a house.
How to Make PMI Work for You
If you decide PMI makes sense for your situation, here’s how to optimize it:
Get Multiple Quotes
PMI rates vary significantly between lenders. Some lenders offer lower PMI as a competitive advantage. Get at least 3-4 quotes and specifically ask about PMI rates.
Boost Your Credit Score
PMI pricing is heavily influenced by credit scores. A jump from 680 to 740+ can reduce your PMI costs by 30-40%. If you’re close to a threshold, it might be worth spending 2-3 months improving your score before applying.
Understand Your Payment Options
You typically have three PMI payment options:
- Borrower-paid monthly PMI (most common)
- Lender-paid PMI (higher interest rate, but no separate PMI payment)
- Single premium PMI (pay upfront, often cheaper long-term)
Run the numbers for your specific situation.
Plan Your Removal Strategy
PMI doesn’t have to be permanent. You can request removal once you reach 20% equity through:
- Regular mortgage payments
- Home appreciation
- Extra principal payments
- A combination of all three
By law, PMI must be automatically cancelled once you reach 22% equity, but you can request removal at 20%. Be proactive.
Make Strategic Extra Payments
Even modest additional principal payments accelerate your path to PMI removal. An extra $100-200/month can shave 6-12 months off your PMI timeline.
Consider Alternative Loan Structures
An 80-10-10 loan (80% first mortgage, 10% second mortgage, 10% down) lets you avoid PMI entirely, though you’ll have two loans with potentially different rates and terms.
The Bottom Line: Do Your Own Math
Personal finance is personal. Your market, your timeline, your financial situation, they all matter.
But the blanket advice to “never pay PMI” ignores:
- Opportunity cost
- Market appreciation
- Rent payments
- Time value of money
- Quality of life
For most people, in most markets, paying PMI for 2-3 years is infinitely better than paying rent while watching home prices climb further out of reach.
Your Action Plan
Here’s what to do right now:
- Research your local market’s appreciation rate over the past 3-5 years
- Calculate your current rent costs and project them forward
- Get a mortgage pre-approval and actual PMI quotes
- Be honest about your savings timeline for reaching 20% down
- Run the numbers for both scenarios
Compare the total cost of waiting versus the total cost of PMI.
I’m willing to bet that, for most people reading this, buying sooner with PMI will come out significantly ahead.
The Truth Nobody Wants to Tell You
The real estate and mortgage industry often perpetuates the “avoid PMI” advice because it sounds wise and responsible. It feels good to tell someone to be patient and save more.
But it’s often terrible advice that costs people enormously.
The best time to buy a home was yesterday. The second best time is today, even if it means paying PMI.
Don’t let PMI fear-mongering cost you $40,000, $60,000, or more.
Run your numbers. Make an informed decision. And maybe, just maybe embrace PMI as the wealth-building tool it can actually be.
What’s your take? Have you paid PMI, or did you wait to save 20%? Looking back, which path do you wish you’d taken? Share your experience in the comments.
FTC Disclaimer: This is not a sponsored video or article. All opinions are genuinely my own. This post also contains affiliate links and I earn a small commission if you make a purchase after clicking on my links. It does not cost you any extra. Thank you for your continued support to keep the Bri Callis Blog going!
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