Mortgage Insurance: Is it worth it?

For many first time home buyers, a dilemma comes up: is mortgage insurance worth it? And why is it even necessary? 

What is mortgage insurance, anyways?

Typically, until a person has about 22% equity in a home, mortgage companies require them to purchase insurance known as "PMI" - private mortgage insurance. So, if you're buying a condo, say, for $300k, then you need at least about $66k in equity, or you'll have to buy a policy in the event of a default. 

Many consumer watchdogs maintain this is unfair and a hidden tax on young and less wealthy individuals. To some extent, those perspectives have merit; the reality is that banks hate to lose money. They want to hedge risks. And first-time buyers of homes have by far the highest incidence of foreclosure. So, there is no likelihood PMI will magically disappear soon. 

The fact of the matter is that home ownership is worth paying a small premium for, at least to those focused on wealth accumulation. There are significant tax benefits, not to mention that most properties appreciate in value over time.

Plus, once you establish good credit, other borrowing options become available, which can be helpful for starting a business or going back to school. Net-net: PMI is a short-term hassle but likely long-term gain. Something not to rule out.
Category: Advice


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