PMI, What It Costs, and Running the Math Both Ways
Last time I argued with the 20 percent rule. Now I owe you the actual numbers, because an argument without numbers is just an opinion in a nicer shirt.
PMI stands for private mortgage insurance. Put down less than 20 percent on a conventional loan and the lender requires it. It's not insurance for you — write this down, people get this wrong constantly. It insures the lender against you defaulting. You pay the premium, they get the protection. I know. A little insulting said out loud. But it's also the tool that lets you buy a house at 10 percent down instead of waiting until you've saved twice as much, and that trade is worth understanding instead of just resenting.
What it actually costs
PMI usually runs between 0.3 percent and 1.5 percent of the loan amount per year, depending on your credit score and down payment size. Use a real number: a $450,000 house in American Fork with 10 percent down is a $405,000 loan. At a middling PMI rate, call it 0.65 percent annually, you're looking at about $2,630 a year, or roughly $219 a month, tacked onto your payment.
That number gets people's attention, and it should. But before you let it scare you off, run the other side of the math too.
Running it both ways
Say you're a renter paying $1,850 a month, deciding between buying now at 10 percent down with PMI or waiting two more years to hit 20 percent and skip it.
Two years of saving, at a realistic pace for most young households, might get you there. But watch what happens meanwhile. Rent in Utah County has not been sitting still, and I don't expect it to start. If your rent climbs even modestly over those two years, you've paid tens of thousands of dollars for a place you don't own, with nothing to show for it when you're done. Meanwhile that $450,000 house isn't waiting for you either. Home prices along the Point of the Mountain corridor have not been shy about climbing, and two years from now the same house, or its replacement, likely costs more than $450,000. You could spend two years saving for 20 percent of a number that no longer exists.
Now compare that to just buying now. Your $219 a month in PMI isn't permanent. Once you hit 20 percent equity, through paydown or appreciation, you can request that it be removed. On a lot of loans that happens in three to five years, sometimes faster if the market's been kind to you. So you're not paying PMI forever. You're paying it as a bridge.
I ran this more than once, with more than one couple's real numbers, and the bridge is usually cheaper than the wait. Not always. In a market that's flat or dropping, or if your rent is unusually low and stable, the math can tip the other way. That's why I won't tell you 20 percent is always wrong. I'll tell you it's wrong often enough that you owe it to yourself to run your own numbers instead of inheriting your grandfather's.
How to actually do this at home
The practical version, step by step — no spreadsheet required if you don't want one, though I'd rather you built one.
- Get your PMI estimate. Ask your loan officer for the actual monthly PMI figure on your specific loan scenario, not a rough guess. It varies by credit score, so this isn't a napkin number.
- Add that to your projected monthly payment. Now you have the true cost of buying with less than 20 percent down.
- Estimate your rent increases if you wait. Utah County rents have moved several percent most years lately. Use a conservative number, not the scariest one you can find.
- Estimate price appreciation if you wait. Same idea. Look at what similar homes did last year, don't assume this year repeats it exactly, but don't assume zero either.
- Multiply both by the number of months you'd actually be waiting.
- Compare the total cost of waiting against the total PMI you'd pay until you hit 20 percent equity.
Most people who do this exercise are surprised by which side wins.
Good place to bring up something from a ward party a while back. A younger couple mentioned, kind of proudly, that they'd gotten "pre-approved," and figured that meant the hard part was done. I ended up spending forty minutes at the folding table walking them through the difference between pre-qualified, pre-approved, and actually cleared to close, because those are three very different levels of certainty and a lot of buyers treat them as the same word. PMI conversations get tangled in the same fog. People hear "PMI" and treat it as one flat, scary, permanent thing, when really it's a variable, temporary cost that depends entirely on your specific numbers. Ask the specific question. Get the specific answer. Don't let a general impression stand in for actual math.
One caution, plainly stated: don't let a lender wave you past this with "don't worry about it, it's small." It might be small. It might not be. Get the number in writing and do the comparison yourself, or with me, or with anyone who'll actually sit down and run it.
Before next time: pull your own rent history if you've moved in the last few years, and see how much it's actually climbed. That number is the other half of this math, and most people have never once looked at it.