Private Mortgage Insurance

Private Mortgage Insurance (PMI) may be added onto your mortgage quote and you may not have any idea what in the world that is. And, since your mortgage quote or mortgage closing papers may include many things you have no idea about, it may not have phased you at all. But Private Mortgage Insurance is one of the things in your mortgage that you need to understand and make an informed decision about. Why? It is likely costing you hundreds of dollars a year, and you need to know if it is worth it. It is after all, insurance that doesn't cover you, it covers the bank. 

PMI or private mortgage insurance is an insurance policy the bank is required to have if you give less than 20% on your home as a down payment. Put up 20% and you get out of the PMI. Put less, you pay PMI until you reach 78% at which time the PMI is automatically deducted from your monthly payments. Why do they need this? Recent difficulties in the housing market have shown that when people put less than 20% down on a home the risks for banks radically increase. At 20% down, usually a bank makes money off the foreclosure since they can sell the home for more than 80% of its fair value quickly. Less than that and the bank has trouble recouping its costs.

What does PMI do for you? Not much. The only thing it lets you do is put down less than 20% and still get a home. In costly housing markets, its essential if you want to own a home. 

You only need to ask that question if you have 20% to put down on a home. If you don't, its moot. But if you do, then it depends. It depends on factors such as these:

• Do you have a 3-6 month emergency fund above and beyond the 20% you have to put down? In other words if your monthly expenses not counting savings, charitable contributions,  and retirement contributions are $3000 then you need $9000-$18,000 socked away in a relatively liquid place plus your down payment. Otherwise you hit a bad time (medical bills, layoffs, injuries, accidents) and you will be foreclosed upon. If you can't swing the 20% without dipping into your emergency fund, pay the PMI.
• Do you have an investment possibility that reliably and conservatively can earn you a higher interest rate than your mortgage interest rate? Whatever money you put into your mortgage saves you the interest rate you would have paid on that money. If your mortgage quote is for a 6% APR loan, then any extra money you put in as a down payment saves you that 6% (it may also lower the actual mortgage quote). If, however you can invest that same money for a reliable return of 8%, then you lose money by putting it into the home.