PMI Isn't a Bad Thing: Why Putting 20% Down Isn't Always the Best Financial Decision

For years, homebuyers have been told that putting 20% down on a home is the smartest way to buy. But is that always true?

One of the most common conversations I have with homebuyers starts with a simple statement:

"We want to put 20% down because we don't want to pay PMI."

And I completely understand that thinking. Nobody wants to pay an unnecessary monthly expense, especially when purchasing a home is already a significant financial commitment.

But here's what I've learned after more than 20 years in the mortgage industry: Many buyers have no idea what private mortgage insurance (PMI) actually costs.

They've simply been conditioned to believe PMI is expensive, wasteful, and something they should avoid at all costs.

The reality? PMI has become surprisingly affordable for many qualified borrowers over the past several years. In some situations, the monthly cost is so minimal that putting an additional $20,000, $30,000, or even $50,000 down to avoid it might not make financial sense.

That doesn't mean PMI is always the right choice. It means we need to stop assuming it's automatically the wrong one.

Let's look at why.

What Exactly Is PMI?

Private mortgage insurance, commonly called PMI, is insurance that protects the mortgage lender if a borrower defaults on their loan.

On most conventional mortgage loans, PMI is required when a buyer puts less than 20% down.

For example, if you're purchasing a $250,000 home and putting 5% down, your loan amount would be $237,500. Because you're financing more than 80% of the home's value, PMI would typically be required.

Here's something important to understand: PMI isn't necessarily permanent.

With conventional financing, PMI can often be removed once certain equity and loan requirements are met. In fact, federal law provides specific cancellation rights for many conventional mortgages.

That means PMI may simply be a temporary expense that allows you to purchase a home without committing a significant amount of additional cash upfront.

PMI Isn't Nearly as Expensive as Many People Think

This is where the conversation gets interesting.

PMI pricing has evolved considerably over the years. Competition among mortgage insurance providers, improved risk assessment, and more sophisticated pricing models have helped make PMI surprisingly inexpensive for many well-qualified borrowers.

Of course, PMI pricing varies based on several factors, including credit score, down payment, loan type, and other borrower characteristics.

But instead of assuming PMI will cost hundreds of dollars every month, let's look at an actual example.

A $225,000 Home Purchase: 5% Down vs. 20% Down

Imagine you're purchasing a home for $225,000.

You have excellent credit, qualify for conventional financing, and have enough money available to make a 20% down payment.

Here is an example of 5% down vs 20% down:

Now, look at those numbers.

By putting 5% down instead of 20%, you're keeping an additional $33,750 in your pocket.

And the monthly PMI expense in this example?

Just $25.

That's $300 per year.

Now ask yourself this question:

Is avoiding a $25 monthly expense worth tying up an additional $33,750 of your cash?

Maybe it is. Maybe it isn't.

But shouldn't you understand those numbers before making that decision?

That's exactly my point.

Your Down Payment Is About More Than Avoiding PMI

One of the biggest mistakes buyers can make is looking at their down payment as simply a way to reduce their monthly mortgage payment.

Your cash has value beyond the mortgage transaction.

Think about everything else that money could potentially accomplish.

Maybe you want to keep additional savings available for emergencies. Maybe you're planning renovations or purchasing furniture. Perhaps you'd prefer to maintain investments, pay down higher-interest debt, or simply preserve some financial flexibility.

Homeownership comes with unexpected expenses. Furnaces break. Roofs eventually need replacing. Appliances don't always cooperate.

Having additional cash available after closing can be incredibly valuable.

And while putting more money down certainly reduces your mortgage balance and interest expense, it also converts liquid cash into home equity.

Home equity is valuable, but accessing it later may require selling your home, refinancing, or qualifying for another loan.

That's an important distinction.

The goal shouldn't automatically be to put as much money down as possible. The goal should be to determine how much money makes the most sense to put down based on your overall financial picture.

But Doesn't Putting 20% Down Save Money?

Absolutely.

And this is where a thorough mortgage analysis becomes so important.

Putting 20% down instead of 5% doesn't just eliminate PMI. It also reduces the amount you're borrowing.

Using our previous example, putting an additional $33,750 down means you're financing $33,750 less.

That results in a lower principal and interest payment, less interest paid over time, and no monthly PMI.

Those are real financial benefits.

However, we also need to consider what you're giving up by using that additional cash.

For someone with substantial savings and no immediate need for liquidity, putting 20% down might be the obvious choice.

For someone who would nearly empty their savings account to reach that 20% threshold, a smaller down payment might be much more appropriate.

For someone who has opportunities to invest their money or eliminate higher-interest debt, the analysis becomes even more interesting.

There isn't one universally correct answer.

And that's precisely why I believe homebuyers deserve more than a quick mortgage quote.

They deserve a strategy.

You Don't Always Need 20% Down to Avoid Monthly PMI

Here's another misconception worth addressing.

Many buyers assume their only two choices are putting 20% down or paying monthly PMI.

That's simply not true.

Depending on your qualifications and loan structure, there may be other options available.

Lender-paid mortgage insurance: Rather than having a separate monthly PMI payment, the insurance cost may be incorporated into the mortgage interest rate. This can eliminate the separate PMI payment, although the higher interest rate may cost more over time.

Single-premium mortgage insurance: In certain situations, PMI can be paid upfront rather than monthly. The premium may be paid by the borrower or potentially covered through an allowable seller credit or lender credit, depending on the loan structure.

Alternative mortgage structures: Some buyers may qualify for programs or financing arrangements that don't require traditional monthly PMI.

Each option has advantages, disadvantages, and different long-term costs.

For example, eliminating a $25 monthly PMI payment by accepting a meaningfully higher interest rate might actually be a worse financial decision.

That's why simply asking whether a loan has PMI isn't enough.

The better question is: What is the total cost of each financing option, and which structure makes the most sense for me?

PMI Can Also Help You Become a Homeowner Sooner

There's another side to this discussion that often gets overlooked.

For buyers who are still saving toward a down payment, waiting until they've accumulated 20% can mean delaying homeownership for several years.

During that time, home prices could increase, interest rates could change, and the amount needed for a 20% down payment could continue growing.

Of course, home prices can also decline, and buying before you're financially prepared isn't something I'd ever recommend.

But if you're financially stable, have appropriate reserves, and can comfortably afford the payment, PMI may provide an opportunity to purchase a home sooner.

Rather than viewing PMI as a penalty for not having 20% down, consider it a financing tool that can make homeownership more accessible.

And remember, with many conventional loans, that PMI expense won't necessarily last for the life of the mortgage.

Don't Make a $33,750 Decision Without Understanding a $25 Expense

Let's return to our original example.

A buyer purchasing a $225,000 home has the option to put 5% down and pay $25 per month in PMI.

Or they can put another $33,750 down and eliminate PMI entirely.

I'm not suggesting that everyone should choose the 5% down option.

I'm suggesting that everyone should understand what they're actually paying to preserve that additional cash.

We should compare the monthly payments, the interest expense, the PMI costs, the available savings after closing, and the buyer's future financial goals.

We should also discuss how long the buyer expects to own the home and whether they anticipate making additional principal payments or eventually removing PMI.

A decision that makes sense for someone planning to stay in a home for 20 years might look completely different for someone expecting to move in five.

And sometimes, after reviewing all those numbers, putting 20% down absolutely makes the most sense.

Other times, it doesn't.

The important thing is that the decision is based on facts rather than assumptions.

My Approach: Understand Your Options Before Making Your Decision

After more than two decades helping families purchase and refinance homes throughout Columbus, Indiana, and the surrounding communities, one thing has become very clear to me:

The best mortgage isn't necessarily the one with the lowest rate, the smallest down payment, or no PMI. It's the one that's structured around your financial goals.

I believe buyers should understand their options, not simply be handed a loan estimate and told what their payment will be.

That means taking the time to compare different down payment scenarios, evaluate mortgage insurance costs, understand the trade-offs, and build a financing strategy that works both today and in the years ahead.

Sometimes that means putting 20% down.

Sometimes it means putting 5% down.

And sometimes it means exploring an entirely different structure.

The Bottom Line: PMI Is Not a Bad Thing!

PMI is a cost of financing, just like interest and other mortgage-related expenses. Whether that cost is worthwhile depends entirely on what you're receiving in return.

Don't automatically assume PMI is expensive.

Don't assume putting 20% down is always the smartest decision.

And don't make a major financial decision based on something you've simply heard over the years.

Look at the numbers. Understand the options. Ask questions. Then make the decision that's right for you.

If you're thinking about buying a home and wondering how much you should put down, I'd welcome the opportunity to walk you through the actual numbers.

You might be surprised at just how affordable PMI can be.

Jason Kain | Ruoff Mortgage

Columbus, Indiana

Phone: 812-343-4265

Email: jason.kain@ruoff.com

Website: www.jasonkain.com

NMLS #438557

Equal Housing Lender. Mortgage insurance premiums, financing terms, and program availability vary based on borrower qualifications and loan guidelines. All loans are subject to credit approval.