Don’t pay PMI on your mortgage

You’ve probably heard your whole life that buying a house is one of the smartest investments you can make. A lot of the time that’s true, but not always. And it’s certainly not a smart thing to do if you aren’t financially ready.

If you don’t remember the market crash of 2008, I’d recommend you watch The Big Short. It’s a slightly fictionalized movie about what really happened, but you’ll get the idea. Basically, banks gave loans to people who couldn’t afford their houses, and when enough of those people inevitably defaulted on their loans, the market crashed. Reality is more nuanced than that, but that’s the general idea.

Why is it relevant? Because there’s a thing called Private Mortgage Insurance (PMI) that the bank will require you to pay if you do not have a large enough down payment. It’s insurance that protects the bank in case you fail to pay your loan. It doesn’t protect you, but you pay for it.

You can avoid paying PMI by having at least 20% of the cost of the house as a down payment. If you want a $100,000 house, you’ll need a $20,000 down payment. This will prevent PMI from entering the equation.

Now, PMI is not inherently evil, and people need to buy houses for a variety of reasons. If you can’t accumulate the 20% down in a reasonable amount of time, I would suggest having at least 10% to put down. You’ll be paying PMI, but you’ll have some equity too. Then, once you’ve paid down another 10% of the value of the house, you can ask the bank to remove the PMI. You may need to get your house reappraised.

I don’t know about you, but if I’m paying an extra couple hundred dollars a month for my house, I want it working to pay off my house, not pay for the banks insurance.

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