Understanding the Cost of Private Mortgage Insurance

by L. Lee Colquitt and V. Carlos Slawson, Jr.

A homeowner currently paying for private mortgage insurance (PMI) should consider the potentially high returns of investing in home equity. Most lenders require PMI for mortgage loans in excess of 80 percent of the appraised value of the underlying home. Such insurance has enabled many families who could not afford a down-payment of 20 percent to become homeowners. However, with recent changes in the premium structure of PMI, potential changes in the tax code, and the availability of numerous credit options, we suggest a reexamination of the home equity investment decision.