December 31, 2003
When you're buying a home, you may end up having to pay for private mortgage insurance (PMI) -- though there are ways you might avoid it.
PMI is extra insurance a lender may require you to buy if you're putting down less than 20% of the property's value as a down payment. This is because people who put down small amounts are more likely to default on a loan. That's frowned upon in the lending business.
PMI is not a negligible expense. It can cost hundreds to thousands of dollars a year. And, unlike mortgage interest, it is not tax deductible.
If you opt for mortgage insurance, once you have 20% equity in your home, you should be able to cancel the insurance. Contact your mortgage provider to find out how. An appraisal is usually required beforehand, but it's worth it. We have a calculator that will help you explore how to reduce mortgage insurance costs.
An important aspect to understand about PMI is that the 20% equity threshold relates to your home's value, not necessarily 20% of the mortgage amount. If you get a great deal and buy your home below market value, buy a fixer-upper and fix it up to increase its value, or pick an area that suddenly becomes popular and appreciates in value rapidly, your mortgage amount might be very different from the value of your home. If you are required to pay for PMI, keep tabs on the changing value of your home.
You'll find more home-buying tips in our Buying a Home area. You can learn about refinancing your mortgage there, too, and you might even discover some attractive rates there. Also, drop by our Buying or Selling a Home discussion board, where lots of savvy Fools can answer your questions and give you advice.