Private Mortgage Insurance (PMI)
Private Mortgage Insurance is required of borrowers who do not have a 20% down payment on the new home they plan on purchasing. The insurance is designed to protect lenders from the risk of default and foreclosure. There are other measures to avoid PMI such as piggyback mortgages and lender-paid mortgage insurance but I'll leave that to the other experts on this forum (ahem, staying in my lane).
When saving for that 20% down payment on your new home…consider I Bonds!
The rockstar unicorn that we are talking about today is Series I savings bonds, also known as inflation-adjusted bonds or I Bonds. I Bonds are providing the safety of bonds - but 9.62% returns of the stock market (well previous stock markets). See the chart below (magnified for those with more "mature" eyes).
A money market account at your local bank is probably only paying 0.2%. To put that into perspective; the earnings on $10,000 are $962 per year (a guaranteed $481 in interest over 6 months) if you purchase an I bond, versus $20 per year putting your money in a money market at your local bank or credit union. You note that only $481 is guaranteed because the rate paid by I Bonds changes every May and November. The good news is that you can purchase I Bonds any month within that 6 month period and get the 9.62% rate for the next six months. So say you purchase your I bond in August 2022, you will get the 9.62% rate until January 2023. Then the rate would adjust to the rate announced in November 2022.
The Fine Print
There are some important caveats to remember with I bonds:
- You must hold I bonds for at least a year before cashing them.
- You should purchase with money you will not need for 5 years or you will lose the previous 3 months' worth of interest (not too bad). Unlike the stock market, your capital (the money you used to purchase the I bonds) is never at risk.
- You can only buy $10,000 worth of I bonds per person per year
Of Course, There Are Taxes
The interest you earn from I bonds is subject to Federal income tax, but not state and local. You can pick your poison:
- Interest can be reported and taxes paid every year or
- Wait and report the interest when you cash or transfer ownership of the bonds, or at 30 years when the bond stops earning interest.
Parents, Grandparents, Aunts, and Uncles I bonds are great for college funding because they are tax-free to the recipient when used for education expenses.
Would any of you recommend I Bonds to family, friends, or prospective buyers as a way to save for a downpayment on a home?
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