Not Enough Down Payment?

Hannah asks when it's okay to purchase a house without 20% down. Dave says when you're willing to pay PMI.

QUESTION: Hannah on Facebook asks when it’s okay to purchase a house without 20% down. Dave says when you’re willing to pay PMI.

ANSWER: When you’re willing to pay PMI. Private mortgage insurance will run $70–75 per month per $100,000 borrowed. If you borrow $200,000 on a home and you do not put down at least 20% on that transaction, then you will have a $150-a-month extra bill as a part of your house payment called PMI (private mortgage insurance).

Private mortgage insurance does nothing for you except pay your mortgage company in the event they have to foreclose on you and they lose money. Private mortgage insurance is foreclosure insurance that protects the lender, and you get to pay for it if you don’t put down 20%. That’s pretty heavy. That’s $1,800 a year on a $200,000 loan. That’s an extra 0.9% on your interest rate in a sense—almost 1% on your interest rate effectively. That’s what it feels like. That’s not a positive thing, but a lot of times, a first-time homebuyer will buy something with 10% down, and then they’ll pay that other 10% as fast as they can to get rid of that PMI because that stuff’s nasty.

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