PMI And The 20% Down Rule That Was Never A Rule

I spent two years not buying a house because I was $34,000 short of twenty per cent. I had read somewhere that twenty was the number, so twenty was the number, and I never once asked what happens if you put down less.

What happens is a fee. That is the entire consequence.

What PMI is, and who it protects

PMI is private mortgage insurance. You pay the premium, and the policy insures the lender rather than you. If you default and the house sells for less than the loan, the insurer covers the lender's shortfall, and you remain responsible for everything else.

That is genuinely irritating and it is also the actual deal. A smaller deposit means the lender is carrying more risk, and PMI is the price of that risk rather than a penalty for not having saved harder.

It usually runs somewhere between about 0.3 and 1.5 per cent of the loan each year, driven by your credit score and how much you put down, billed monthly alongside the mortgage. On a $360,000 loan at 0.6 per cent that is $2,160 a year, which is $180 a month.

The comparison nobody put in front of me

The 10 per cent column costs $432.83 a month more. Split that: $180 is the insurance, and $252.82 is the interest and principal on the extra $40,000 you did not put in.

Only the first half is temporary. The second half is the real cost of borrowing more, and it runs for thirty years unless you refinance or overpay.

When it goes away

This is the part I did not know existed. PMI is not permanent, and on most loans it is not even discretionary.

Under the Homeowners Protection Act of 1998, for most single family primary residences, you can request cancellation once the balance reaches 80 per cent of the home's original value, and the lender must terminate it automatically at 78 per cent based on the original payment schedule, provided the payments are current. On the $360,000 example, 80 per cent arrives in month 95 and 78 per cent in month 109.

Those fourteen months between the two are $2,520. Nobody will remind you. Ask.

So what does waiting actually cost

Here is the trade in one comparison. Buying at 10 per cent down costs roughly $17,100 of insurance you would not otherwise have paid, spread across about eight years.

Saving the extra $40,000 at $1,000 a month takes forty months. Across those forty months you are paying rent, the house is whatever price it turns out to be, and the mortgage rate is whatever it turns out to be. Three of those four numbers are unknowable in advance, which is exactly why nobody frames the decision this way.

Neither answer is automatically right. What is automatically wrong is the version I ran for two years, where twenty per cent was a rule and the question simply never came up.

The loans where this works differently

• FHA loans carry a mortgage insurance premium rather than PMI, and depending on the loan it can last the full life of the loan instead of dropping off at a loan to value threshold. Refinancing out is often the only exit.
• Lender paid mortgage insurance folds the cost into a higher interest rate rather than a separate monthly line. There is no cancellation date, because there is nothing to cancel.
• Some loan types, including VA loans for eligible borrowers, carry no monthly mortgage insurance at all and use a one time fee instead.
• Cancellation thresholds are generally measured against the original value rather than what the house is worth now, though many servicers will consider a fresh appraisal if values have moved and their own rules allow it.

What to ask, and when

Call whoever services your loan, or ask the lender before you sign anything, and get three answers in writing. What type of mortgage insurance is on this loan.

What date does it come off on the original schedule. What exactly do I have to do to cancel it earlier.

Then put that date in a calendar with a reminder ninety days ahead of it. It is the highest paid five minutes in this article, and it is the one item on the list that nobody at the closing table has any reason to raise.

And if you are still saving toward twenty, run your own version of the $17,100 against your own rent and your own timeline. It might well tell you to keep saving. Mine told me to stop.

What else the bigger deposit buys

PMI is the visible cost of a small deposit and it is not the only one. Mortgage pricing moves in tiers by loan to value, so a borrower at 80 per cent is often quoted a slightly better rate than the same borrower at 90 per cent, insurance aside. On a $320,000 loan even a quarter point of rate is about $52 a month for thirty years.

PMI itself is priced on your credit score as well as your deposit, which is why the range runs from roughly 0.3 to 1.5 per cent a year. On a $360,000 loan that is $90 a month at the bottom and $450 at the top, for identical cover on an identical house. If your score sits near a threshold, a few months of work on it can be worth more than a few months of saving.

And in a market with competing offers, a larger deposit reads as a stronger buyer to a seller weighing two bids. That is not arithmetic and I cannot price it, but it is real and it belongs in the decision.