As real estate remains a valuable long-term investment, it’s crucial for buyers to ensure they have a solid down payment. While it’s ideal to save at least 20% of the home’s purchase price, achieving this can be challenging, especially for first-time buyers.

Having a substantial down payment offers several benefits, with one of the most significant being the ability to avoid Private Mortgage Insurance (PMI). Lenders typically require PMI if your down payment is less than 20% of the loan amount. This insurance protects the lender in case you default on the loan, but it does nothing to benefit you. In fact, PMI can add hundreds of dollars to your monthly payments, reducing the amount you can borrow.

Here’s what you need to know:

What is PMI? PMI is a monthly premium paid to an insurer that covers the balance of your mortgage if you default. The purpose of PMI is to protect the lender in case the borrower defaults on the mortgage.

Consequences of Defaulting If you default on your mortgage, you risk losing your home to foreclosure, and your credit score will suffer significant damage. In the event of a foreclosure, PMI helps cover the lender’s losses by compensating them for the unpaid portion of the loan.

How to Avoid PMI PMI is required for most standard mortgages when the down payment is less than 20%. However, loans backed by the Federal Housing Administration (FHA) have different requirements, and loans from the Veterans Administration (VA) and the Department of Agriculture (USDA) do not require PMI, though they may have other fees, such as a funding fee.

The Cost of PMI The cost of PMI varies depending on the size of your loan and your credit score. PMI fees can range from 0.58% to 1.86% of the original loan amount. At the higher end, this can add more than $300 to your monthly mortgage payment.

Is There Any Good News? The good news is that PMI is tax-deductible, and once your home equity reaches 20% of the loan’s value, you can stop paying PMI. Accelerating your loan payments can help you reach this threshold sooner and eliminate the extra cost.

Final Considerations Entering the housing market with less than a 20% down payment has its drawbacks, but if you find the perfect property before reaching that savings goal, it may still be worth moving forward to avoid missing out on the opportunity. Weigh the pros and cons carefully and consider consulting with a financial advisor to determine the best approach for your situation.

Note: The information provided here is for general guidance only. Always consult with a financial advisor or accountant to get advice tailored to your personal circumstances.