Is It Worth It to Take on a Loan with PMI?
Are Loans that Require Private Mortgage Insurance Worth it?
You should consider several factors before deciding whether to take on a loan that requires PMI. Taking on a loan with PMI can often increase the amount of options you have, meaning that you may be able to take on a larger or riskier loan than you would regularly qualify for. Often, this means you can buy a home earlier, and start building up its equity without having to save up the full 20% of the home’s purchase price before doing so.
However, having private mortgage insurance means having to come up with extra money out of pocket each month, or for an upfront fee. The cost of PMI is generally between 0.5% and 1% of the loan amount annually. That means that with a loan of just $100,000, PMI could cost you an extra $1000 over the life of the loan!
For those who want to avoid paying PMI, you still may be able to take out a loan with a small down payment. However, many mortgages featuring small down payments and no-PMI have noticeably higher interest rates -- but not always. That's why we strongly advise potential home buyers to shop around for lenders and talk to mortgage experts before committing to any loan product.