I had one of my favorite phone calls today. First time home buyer doesn’t think they can buy a home because they don’t have 20% down. And they said, I don’t want to have PMI, so I’m not going to buy home. I made them laugh and said, I’d rather have you call and say you don’t want to increase your net worth and make more money.
Of course, they paused. They want to know what I was talking about. There are certain circumstances where PMI is of great value and will help you. And let me explain to you what it means if you don’t know. PMI stands for private mortgage insurance, it’s insurance to the lender. If you’re putting on less than 20%. Lots of pretty colors and numbers.
Let me walk you through it. PMI can equal a greater net worth and ultimately more money. Sales price of $800,000. Dow Panel 80,000. 10% of the sales price. Loan amount $720,000. Let’s presume a mortgage payment of $4,433, which is a 30 year fixed six and a quarter percent today. 6.378%. APR. The monthly PMI on that, it’s about $180 a month.
In three years you’ll spend $6,400 on PMI. Five years you’ll spend $10,800. And in eight years, about $17,000. The PMI typically falls off automatically in around eight years, $17,000. Let’s go to the good math. If you say your home is going to appreciate 3% a year, depending on what statistics you believe, I can run this model at any number in three years.
Your home’s now worth $874,000. You’ve increased $74,000 in appreciation. You’re net worth. Five years, you’ve gone $127,000 net worth. Eight years. $213,000. Let’s finalize the math for you. If your home goes up in three years, $74,000 and you spend $6,400 and tomorrow you have a new net worth of $67,000. I don’t know why you wouldn’t buy a home just because you have PMI.
Stop looking at the Internet. Stop listening to people give you bad advice. Call a mortgage professional. Ask them to run the numbers for you based on your scenario. It’s still got to be a fit, but let the math make the decision, not the internet or some archaic rule. Thanks for listening. Have a great day.