PMI is so . . . evil??

Posted on May 3, 2005 - Filed Under Philosophy |

I had lunch with a couple the other day.  I told them that I was going after real estate and would have a piece before the end of the summer.  As usual, I was filled with all kinds of optimism about having this in place and I felt that nothing could stop me.

The first question that they asked me was if I had 20% to put down.  I told them that I didn’t need twenty percent to put down.  This made them cringe.  When I asked why, they said that they were saving money because they didn’t want to pay PMI (Private Mortgage Insurance).  They had decided not to buy any real estate until they had 20% to put down on a place.

By now, I had gotten use to my idea that "Everything that everyone has ever told me is wrong."  I pulled out my palm pilot and started doing calculations.

So here are some calculations that I did.

The average PMI payment is around $110/month.  This is roughly $1300/year.  And that does seem like a lot.

The average price for a condo is around $300,000.  Even if you figure ultraconservative, the price of real estate goes up around 3% a year.  That is $9,000 a year in appreciation.  Believe me, that’s ultra-conservative considering real estate performance during the past 4 years.

I asked the couple a hypothetical question.  "Would you give me $1300 if I turned around and gave you $9,000?"  They emphatically said that they would.  I told them that their PMI argument made no sense.  But they were emphatic.  They absolutely refused to pay PMI even though they were losing money every single day but not getting into the game.

In California, the price of real estate doubles every 7 to 10 years.  That’s historical fact.  So today, you buy a condo for $300,000.  In ten years, it’s value is at $600,000.  During that ten years, you paid $13,000 in mortgage insurance but you gained $300,000 in pure appreciation.  No, you didn’t.  You refused to pay PMI.

I really wish someone could explain this argument to me in a way that made sense.  Why wouldn’t you give up $1,300 a year for $9,000 in return?  The stock market, if you’re lucky, will give you 8% return.  Eight percent return on $1,300 is $104.  Again, the logic here escapes me.

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