Housing Diaries: Is my math wrong or does PMI make sense for me?

Originally published/last updated on myearlyretirementjourney.com on Feb 21, 2020.

I was awakened from sleep with worries that the PMI I willfully accepted on my mortgage loan would ruin everything. I don’t know what “everything” is exactly but the worry persisted none the less.

One thing (of few) I did know going into the home buying process was to get loan “quotes” from different lenders. I had no idea what to look for, so I asked the internet.

The internet said different things such as comparing APR, cost after 5 years, interest rate.

I did a combination of those things and focused on a 6 year time horizon. In 6 years, I hope to reach a FIRE number of $500k. See my FIRE Tracker for more information. So 6 years would be my next financial (and life) inflection point.

Does PMI make financial sense for me?  Here’s what my calculations show. 

$77k house (approx)	FHA w/ PMI	Conventional, no PMI
Down Payment	$2,691 (3.5%)	$14,378 (20%)
Interest rate	3.625%	4.125%
Monthly Payment (incl. P/I, PMI, Insurance, taxes, HOA)	$568	$470
Monthly payment x 72	$40,931	$33,874
Cash to close	$2,698	$16,646
Total Cost in 6 years	$43,629	$50,520
Balance in Feb 2026	$66,018	$54,398

Here are some assumptions and premises used in my calculations and though process:

• Transaction is purely financial (not an investment)
• Goal is to reduce monthly housing expenses
• Goal is to reduce overall housing expense
• Time horizon is 6 years

The number I used to compare all the loan estimates was the Total Cost in 6 years. This included cash to close + monthly payments over 6 years. For me the FHA loan made the most sense purely based on total cost over six years. The lender offers $4500 in closing costs for the FHA loan vs ~ $2200 for conventional loan.

It’s hard to predict anything in life. Maybe the world ends, and I have to move in 6 weeks or I totally love it and want to stay for 100 years. Anything’s possible, but I can only use the next best data points available to me. So I went with 6 years as my time horizon for comparison. And based on that, the math showed the FHA loan with its upfront PMI ($1299) AND monthly PMI ($55/mon) to be the best deal.

I couldn’t believe it either. What about building equity with a larger down payment and the fact that I’ll owe about $10k more at the end of 6 years with the FHA loan?

Here’s my reasoning. I currently live in a very desirable neighborhood where the median household income is about $100,000 (actually a bit more). Homes here tend to appreciate and sell fast. The neighborhood I’ll be moving to is almost 100 miles away where the median household income is about $50,000 (actually a bit less). I’ve been warned by more than one person not to move to this area. The crime rate is high, and it has a bad reputation. I’ve been cautioned by at least one person that my single status and ethnicity will pose an additional risk. Based on that, my presumption is the best I can hope for in 6 years (or whenever I am ready to sell) is a net sale of what I paid for the property ($77k).

Even with that, the FHA loan still proves to be the better deal. Here’s how.

I sell the house after 6 years with net proceeds after fees of: $77k

w/FHA balance of $66k: 77 – 66 = $11k credit to me

w/Conventional loan balance of $54k: 77-54 = $23k credit to me

Yay!! Conventional loan shows to be $12k more in credit to me.

But, wait…

Remember, FHA total cost of $43k – credit : 43 – 11k = $22k of costs

Conventional loan, total cost of $50k – credit: 50 – 23k = $27k of costs

So I keep $5k of my money. That’s an IRA! So to me, going into the transaction knowing the property is unlikely to appreciate significantly in value, I still win financially with the FHA loan. Even though my monthly payment is higher; I’m paying PMI twice; and I’m putting down a smaller downpayment.

It just goes against everything the PF community might say, and everything I feel like is being circulated when it comes to loans, debt, and mortgages.

What am I missing?

Related reading: My Home Buying Journey