What’s The Deal With PMI (Mortgage Insurance) and Should You Really Avoid It?

When purchasing a property, you will need to put money down in order to get a loan. Contrary to popular belief, you do not always need to put 20% down in order to purchase a property. Sometimes, depending on the structure of the loan, you will be able to put down as little as 3.5%. This is what is known as an FHA loan.

When putting less than 20% down, however, you will need to pay what is called mortgage insurance, or PMI. PMI is a small fee you will pay on your loan every month for not putting down the full 20%.

Some people have advised against paying PMI. They tell you not to put down anything less than 20% for this reason and to avoid PMI at all costs.

But from my experience, PMI is not all that bad. On my first deal, a single-family home that I bought to live in and house-hack, I put 14% down. This meant that I would need to pay PMI every month on my mortgage. At first, I was skeptical, and I remembered all the different industry experts who were saying how much you need to avoid PMI. 

However, when my lender ran the calculations, PMI on my mortgage was only $40 a month. 

I figured that this was a non-issue. It would not hurt my bottom line, it would not drastically alter my cash flow. Even though I was able to put the full 20% down, I did not do so because I wanted to have some money on the side for renovations.

Besides, even if you do pay PMI for the first year, you are always able to refinance the property later and get rid of the PMI altogether.

You will not pay PMI for the remaining 30 years of the loan. In fact, the PMI goes away once you’ve paid up to a certain amount of the loan.

In my opinion, I would consider putting less down on a property and having PMI than spending all your money on one property. If you have enough to put 20% down on a property, wouldn’t it make more sense to buy two properties with 10% each, if the monthly payment calculations including PMI work in your favor?

Or, like in my case, putting 14% down and using the other 6% of what would have been the full 20% down payment to renovate the home, add value to it, and then refinance after the seasoning period of the home has passed.

This way, you are able to put more money towards adding value to your home, which will help you when refinancing.

Consider this when choosing whether or not to put more money towards your debt instead of keeping it in cash: You can always pay more money towards your debt, but you can never take the money back out after it has been paid.

I would advise you to run the numbers on every deal. Calculate how much your PMI will be and see if it will greatly affect your cash flow. As I’ve already mentioned, you do not always have to put 20% down. Sometimes, it makes sense not to. That money could be better used adding value to the property.

And if you will pay a few hundred dollars in PMI during that seasoning period, but gain tens of thousands of dollars in equity using that money to instead remodel the home, which one would you choose?