I keep hearing buyers say they won’t touch FHA loans or low down payment options because they don’t want to pay PMI. They think PMI is just throwing money away. That’s nonsense. Let me explain.
Here’s the truth: first-time buyers who use PMI often come out way ahead of renters trying to save that mythical 20% down. The math isn’t complicated. While you’re sitting on the sidelines saving, home prices keep climbing. By the time you’ve saved 20%, the house you wanted is out of reach.
PMI isn’t wasted money. It’s your ticket into the game. It gives you a way to start building equity now instead of three years from now.
I’ve been selling homes in the East Bay for years, and I’ve seen this play out over and over. The buyers who wait get priced out. The buyers who move forward with PMI build wealth through ownership.
So stop thinking of PMI as a penalty. Think of it as your bridge to homeownership.
PMI Isn’t Your Enemy. It’s Your Entry Ticket
Let’s talk numbers, because that’s the only way this conversation makes sense.
Say you’re eyeing a $500,000 house. You put 3.5% down with an FHA loan. PMI might run you about $200 a month. Keep it for two years, that’s $4,800 total.
Now, let’s say that $500,000 house appreciates to $600,000 in those two years (which is pretty typical around here). You just gained $95,200 in equity. Subtract the $4,800 PMI. You’re still up more than $90,000.
So here’s the real question: would you pay $5,000 to make $90,000? Of course you would.
But here’s what too many buyers do instead: they say, “I don’t want to pay PMI.” So they keep renting for two years, trying to save up 20%. Meanwhile, that same $500,000 house is now $600,000. They didn’t avoid costs. They made the house more expensive.
The Real Cost of Waiting: The market doesn’t stop while you save. I’ve had clients who were “almost ready” two years ago. Those same homes now cost $150,000 more. They avoided $300 a month in PMI, only to need $30,000 more for a down payment and face higher monthly payments on a bigger loan.
That’s not smart money management. That’s being penny wise and pound foolish.
PMI Gets You In the Game The most important thing PMI does is get you building equity instead of paying someone else’s mortgage. Every month you rent is a month you’re not building wealth. Every month you wait, prices may climb higher.
Here’s what I tell my first-time buyers: if you can afford the payment, it doesn’t matter how much you put down. Keep cash for improvements, moving costs, and life. Don’t let PMI stop you from stepping into homeownership now.
The Smart Way to Think About PMI Costs
Here's how I explain PMI to bay area first time buyers: you need to look at the total picture, not just the monthly payment.
PMI Typically Costs 0.3% to 1.5% Annually On most loans, you're looking at $200-500 per month depending on your loan amount and credit score. For a $700,000 loan, PMI might cost $350 monthly. That sounds like a lot until you compare it to rent increases and missed appreciation.
PMI Removes Automatically People act like PMI lasts forever. It doesn't. By law, PMI automatically cancels when your loan balance reaches 78% of the original home value. In the East Bay's appreciating market, this often happens within 3-5 years through normal payments plus appreciation.
You can also request PMI removal at 80% loan-to-value ratio. Many of my clients get there faster by making extra principal payments or getting a new appraisal showing appreciation.
Compare PMI to Your Alternatives Don't compare PMI to zero. Compare PMI to your alternatives. If your alternative is paying rent for three more years while saving for 20% down, factor in rent increases plus the appreciation you're missing. PMI usually wins that comparison easily.
If your alternative is putting down 20% but having no cash cushion for repairs, improvements, or emergencies, PMI might still be the smarter choice. You can always make extra principal payments later, but you can't undo being house poor.
PMI Strategies That Actually Work
After helping hundreds of PMI first time buyers in the East Bay, here's what actually works:
1. Don’t Stretch Your Down Payment Just to Lower PMI
I see buyers put down 10% instead of 5% to shave a little off PMI, even if it wipes out their savings. That’s backwards. PMI at 5% down versus 10% down might only differ by $50-100 a month, but keeping $25,000 in cash gives you flexibility. That’s worth more than saving $75 on PMI.
2. Shop Lenders for PMI Rates
PMI costs aren’t the same everywhere. The same borrower could pay 0.5% with one lender and 0.9% with another. On a $600,000 loan, that’s a $200 monthly swing. Always compare quotes from multiple lenders and look at the total monthly payment, not just the interest rate.
3. Consider Lender-Paid PMI
Some lenders cover PMI in exchange for a slightly higher interest rate. This can make sense if you plan to stay long-term because interest is tax-deductible, while PMI often isn’t. Run the numbers both ways before you decide.
4. Plan Your PMI Exit
Know the exact loan balance required for PMI removal and track it. If you get a bonus or tax refund, apply it to principal. Even $2,000-3,000 extra each year can knock a year or more off your PMI timeline.
5. Don’t Let PMI Dictate Your Price Range
Too many buyers compromise on homes they don’t really like just to cut PMI costs. That’s penny wise and pound foolish. If PMI on a $750,000 home you love is only $100 more per month than PMI on a $650,000 home you tolerate, and you can afford the payment, choose the home you actually want.
Common PMI Myths That Stop Buyers
Let me address the nonsense I hear about PMI that keeps good buyers from making smart decisions.
"PMI is Money Down the Drain" So is rent. So is the lost appreciation while you sit on the sidelines saving a bigger down payment. PMI is what allows you to start building wealth through ownership. That’s not money wasted. That’s money working for you.
"You Should Always Put 20% Down" Says who? If PMI costs $300 a month but putting 20% down drains your cash reserves, that’s the bad financial decision. Keeping cash for improvements, repairs, and emergencies is smarter than tying it all up just to avoid PMI.
"PMI Makes Homes Unaffordable" If $200-400 a month makes the payment impossible, the real issue is that the house is out of your price range. PMI doesn’t make homes unaffordable. Shopping above your budget does.
"Interest Rates Are Too High for PMI to Make Sense" This is backwards. Higher rates mean fewer buyers qualify, which often means better prices and more negotiating power. You can refinance if rates drop. What you can’t do is go back and buy at today’s prices if values rise.
The East Bay Market Reality Check
Here's what I'm seeing in the current East Bay market that makes PMI even more attractive for bay area first time buyers.
Inventory Is Relatively High Right Now Unlike 2020-2022, we actually have inventory. Buyers have more choices and can be pickier. At the same time, many are moving slowly and showing less urgency. That creates openings for buyers who are ready to act when the right home comes along.
Buyers Are Super Picky Today’s buyers want to deduct renovation costs from asking prices, even when homes are already priced for condition. They hesitate. But make no mistake: great homes priced correctly still move fast and often go over asking.
For PMI buyers, this is good news. You get more time to shop without the frenzied bidding wars of a few years ago. That extra breathing room lets you weigh PMI costs against the long-term wealth you’ll build through ownership.
Move-Up Buyers Are Hesitant Many potential sellers don’t want to trade their 2.75% loans for today’s 6% rates. That keeps some inventory tight, especially for larger homes. But for entry-level properties, it often means less competition from move-up buyers. PMI buyers are competing with fewer people for the kinds of homes they want most.
Frequently Asked Questions About PMI
How long does PMI last? PMI automatically cancels when your loan balance reaches 78% of the original home value. In the East Bay’s appreciating market, this usually happens within 3-7 years, depending on your down payment and local appreciation.
Can I get PMI removed early? Yes. Once your loan-to-value hits 80%, you can request PMI removal. Some buyers speed this up with extra principal payments or by making improvements that boost their home’s value.
Is PMI tax-deductible? It can be, depending on your income and current tax laws. Many first-time buyers do qualify, but always check with a tax professional for your specific situation.
Should I choose FHA or conventional with PMI? It depends on your credit score, down payment amount, and loan size. FHA allows lower down payments and credit scores but has mortgage insurance for the life of the loan. Conventional PMI can be removed but typically requires higher credit scores.
What if home values go down? Home values can fluctuate short-term, but East Bay real estate has appreciated consistently over longer time periods. If you're buying a home you can afford and plan to stay for several years, short-term value fluctuations matter less than long-term wealth building.
My Take: PMI Is Often the Smart Choice
Here’s my honest opinion after years of helping first-time buyers in the East Bay: PMI fears keep more people from building wealth than PMI costs ever will.
The old advice to “never pay PMI” comes from a different era, when home prices moved slowly and predictably. That’s not the East Bay today. In this market, appreciation often outpaces savings by a wide margin. Waiting to avoid PMI usually costs buyers far more than PMI itself.
I’m not saying PMI is the right move for everyone. But for qualified buyers who would otherwise rent for years trying to save 20%, it’s often the smart move. If you can afford the payment and you’ve found a home you want to own long-term, PMI can be the bridge that gets you building wealth now instead of later.
The best time to buy a home is when you find one you like and can afford. If PMI makes that possible sooner, it’s often the smarter financial decision in our market.
Ready to See If PMI Works for You?
If you’re a qualified first-time buyer who’s been avoiding PMI, let’s have a real conversation about your situation. I’ll run the actual numbers for homes in your price range and the neighborhoods you’re considering.
My first-time buyers in the East Bay consistently tell me that using PMI to buy sooner was one of the best financial decisions they made. Instead of sitting on the sidelines, they’re building equity, enjoying homeownership, and gaining from appreciation.
In most cases, the math favors buying sooner with PMI rather than waiting years to save 20% down. But every situation is different, and the only way to know for sure is to look at your numbers.
When you find a home you like and can afford, that’s the right time to buy. If PMI helps you get there, it’s money well spent.
Ready to see what you qualify for and explore your options? Contact me today and I’ll give you a clear, realistic analysis of how PMI could work for you.
— Kelly Crawford
Realtor, Kelly Crawford Team - Lafayette, CA
