I’m beginning to realize that I might be purchasing my first house without the golden standard of 20% down. For personal finance gurus who are guffawing and shaking their heads, the truth is I live in an expensive area and 20% down on homes in my area is more than most people make in a year. I’m beginning to feel like I’m throwing my money away by paying rent when I could have a mortgage for less each month even once I throw in taxes, home owner’s insurance, and private mortgage insurance (PMI).
Yes, if I qualify for a loan with less than 20% down, I’m most likely looking at being slapped with PMI. Of course, if my overall monthly mortgage is less or equivalent to what my current rent is, then it may well be worth the price.
Let’s look at a breakdown of rent versus mortgage on a modest house in my area for $350,000. If I can manage to save 10% for a down payment, or $35,000, my monthly mortgage rate would be $2,239 per month which factors in principal, insurance, tax, and PMI. That’s only $39 a month more than what I’m paying for rent. Over time if I can estimate my home appreciation value at a meager 3.5%, I’d earn back the majority of mortgage I’d have paid over 30-years once I sell the house. Not too shabby. (My figures come from Michael Bluejay’s Renting vs. Buying a Home calculator).
PMI sounds scary and it’s why many people strive for the 20% down rule, but if renting is just as much as a mortgage, then it might be worth taking on the commitment. Also, PMI isn’t forever. Once I’ve paid down the mortgage to 80% loan-to-value ratio, PMI should disappear (a question I’ll be asking before committing to PMI) with proper documentation.
Of course, there are some ways to skirt PMI by taking an 80-10-10 loan. One loan covers 80% of the mortgage, a second covers 10% of the mortgage and the buyer puts down 10%. Just another way to secure a home without a 20% down payment. I’d have to crunch the numbers to decide which would save me money, but the difference between the two choices is usually a $25 difference a month on average.
Learn more about PMI here:
Now, I just have to find the right house.
Do you pay or have you paid PMI? Or take out an 80-10-10 loan?