Why PMI Is Not a Waste of Money: How It Helps You Build Wealth Sooner

Paying for PMI protects your lender, but what's in it for you? Is PMI just a waste of money? We understand the frustration some first time buyers have about adding PMI to their monthly PITI amount. 

But what if we told you that PMI isn't a waste of money at all? In fact, paying PMI can actually help you build wealth faster and achieve your homeownership goals sooner. Here’s why PMI is not something to dread—and why it could be a smart financial decision.

What is PMI and Why Does It Exist?

First, let’s quickly break down what PMI is. PMI is an insurance policy that protects the lender in case you default on your mortgage. Typically, if you put down less than 20% of the home’s purchase price as a down payment, your lender will require you to pay PMI. This insurance makes it less risky for the lender to approve a loan for someone with a smaller down payment, which is why it’s often required for borrowers who are putting down less than the standard 20%.

The cost of your PMI payment will vary depending on the home you buy and other factors specific to your lender. Typically it will be between 0.5% and 2% of the loan total spread across a year. 

PMI: A Small Price to Pay for Homeownership

The way we see it, PMI is literally a small price to pay to become a homeowner. While it may feel like you’re throwing money away on PMI, think of it as a short-term cost that allows you to achieve long-term financial goals. Without PMI, you would likely need to save up a 20% down payment before buying a home, which could take years or never happen at all. Here’s where PMI comes in handy: it allows you to buy a home sooner, so you can start building wealth through homeownership earlier.

Building Equity Sooner

When you buy a home, you’re not just paying for the house—you’re building equity over time. Equity is the portion of the home that you truly own, calculated by subtracting the amount you owe on your mortgage from the home’s current market value. By paying PMI, you’re able to buy a home earlier and start building equity right away.

If you delay purchasing a home until you can afford a 20% down payment, you miss out on those years of equity growth. The sooner you get into the market, the sooner you begin to gain equity, which can provide you with a financial cushion as property values appreciate over time.

Tax Benefits

For some homeowners, PMI can even provide tax advantages. While the 2017 tax reform law made it more difficult to deduct PMI for many people, if you meet certain qualifications, it can still be deductible. In other cases, the cost of PMI is less than other potential alternatives like higher interest rates or waiting to save more for a larger down payment. So, even though PMI feels like an extra expense, it might be a more cost-effective option in the long run compared to waiting for a bigger down payment.

Additionally, if you’re paying PMI on a home loan that’s part of a government-backed program (like FHA loans), your monthly mortgage payments may be lower overall, and you may have access to more affordable financing terms than you would with a conventional loan.

PMI is Temporary

One of the biggest misconceptions about PMI is that it’s a long-term cost. In reality, PMI isn’t permanent. Once you’ve built enough equity in your home—typically when you’ve paid down your mortgage balance to 80% of the home’s original value—you can request that your PMI be canceled. In some cases, the PMI will automatically be removed when your mortgage balance reaches 78% of the original home value.

Once PMI is removed, you’ll have a lower monthly payment, meaning more of your payment goes toward principal and equity, rather than insurance. At this point, which may come sooner than you think if the market grows quickly, your PMI has more than paid for itself and you can stop paying it. 

While PMI may seem like an added expense at first glance, it actually provides a significant benefit by allowing you to purchase a home sooner, start building equity earlier, and take advantage of a rising real estate market. It’s a small price to pay for the opportunity to enter homeownership without waiting years to save up a 20% down payment.

Ready to get started on the search for your first home? Contact us any time to learn more about homes for sale in St. George.