October 27, 2006
Private mortgage insurance (PMI) is extra insurance a lender may require you to buy if you're forking over less than 20% of a property's value as a down payment, because people who put down small amounts are more likely to default on a loan. If you opt for mortgage insurance, once you've got 20% equity in your home, you should be able to cancel the insurance (although an appraisal may be required beforehand).
An important thing 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 a locale that suddenly becomes popular and rapidly appreciates in value, your mortgage amount might be very different from the value of your house. If you're required to pay for PMI, keep tabs on the changing value of your home.
Last time we ran this article, we heard from a reader named Octavian, who had this to say:
You ... failed to mention a way to avoid PMI even if paying less than 20% down. When we bought our house, we only had 10%. Our mortgage broker advised us to open two mortgages, one for 80% and the second for 10%. The second mortgage rate was higher, nonetheless we ended up paying less than if paying PMI, with the interest paid being tax deductible. This kind of arrangement seems to be called 80-10-10.... To your credit, there are many mortgage brokers who either are not aware of this approach or otherwise do not advertise it. I do not know why, since it worked beautifully for us. We refinanced last year with no penalty (rolling two mortgages into one).
You'll find more home-buying tips in our Buying a Home area, where you can learn about reducing your mortgage costs and check out interest rates.
You might also want to check out these articles:
And if you're in the market for a mortgage, another way to inform yourself about options is to spend some time at the websites of lenders. Here are some of the biggies:
- Capital One
- Countrywide Financial
- National City
- Bank ofNew York
National City is aMotley Fool Income Investor recommendation.