Is Private Mortgage Insurance Worth Paying in 2021?

Private mortgage insurance can make your housing payments more expensive. But in some cases, it may be worth it.

Many mortgage lenders require a 20% down payment when you close on your home. But some lenders will give you a loan even if you don't have 20% to put down. That may seem like a good option if you're short on funds. But one thing you should know is that if you don't make a 20% down payment on a conventional mortgage, you'll be hit with private mortgage insurance, or PMI.

PMI is an added premium you'll need to pay on top of your monthly mortgage payment. Its purpose is to protect your lender in case you fall delinquent on your mortgage. PMI is generally calculated as a percentage of your loan amount and typically ranges from 0.5% to 1% of the sum you borrow. This means that if you take out a $200,000 mortgage, you could get stuck paying up to $2,000 a year, or $167 a month, in PMI.

Clearly, that added expense could make it difficult to keep up with your housing costs. You can get rid of PMI eventually. But that won't happen until your mortgage balance falls to 80% of your home's value, which could take years if you make a small down payment.

Buyers are often advised to avoid PMI. But should you think about making an exception given today's low mortgage rates?

An expense that may be worth paying

The downside of paying PMI is obvious -- you'll have a higher housing payment to work into your budget. But the one reason you might consider PMI this year is that if you buy a home soon, you could lock in a really competitive mortgage rate that saves you money over time.

Right now, mortgage rates are sitting near historic lows, and chances are, they'll stay that way for much of 2021. Beyond that, however, we don't know how rates will trend. Much will depend on how quickly the U.S. economy digs out of its current slump. But if you're looking to buy a home and don't have a 20% down payment, waiting a year or two could mean missing out on today's great rates. As such, you might consider taking on PMI to lock in a competitive mortgage.

Imagine you sign a 30-year, $200,000 fixed loan today at 2.9%. Your monthly principal and interest payment will be $833, and you'll pay a total of about $100,000 in interest in the course of your 30-year repayment period. If you don't put down 20% on your home, you could pay another $167 in PMI on top of that $833, bringing your total monthly cost to $1,000.

Now, let's say you wait a couple of years to sign a mortgage so you can save up a 20% down payment. If the best rate you're able to get on a 30-year mortgage at that point is 4.5%, you'll end up with a monthly payment of $1,013 for principal and interest on a $200,000 loan. That's higher than the $1,000 you'll pay for a cheaper mortgage plus PMI. Plus, the total interest you'll pay on your loan will be about $165,000 due to that much higher rate.

As such, it could actually pay to take on PMI this year despite its cost. What you pay in the form of a monthly premium, you could save in the form of a much lower interest rate on your mortgage. Ultimately, your best bet is to crunch the numbers with a mortgage calculator and see what makes sense for you.

You won't pay PMI forever

Remember, too, PMI won't stick around forever. If your home value increases a lot after your close on your loan, you can ask to have PMI removed once your mortgage balance drops to 80% of your home's value. Similarly, if you do well financially after closing on your loan and can pay more into your mortgage's principal early on, you can also knock out PMI somewhat quickly. Of course, you can get rid of PMI simply by paying off your mortgage, but that could take years.

The takeaway? PMI can be costly, but under the right circumstances, it's an expense worth bearing. Keep that in mind if you're short on funds for a down payment but are otherwise in a solid position to buy a home today.