Please ensure Javascript is enabled for purposes of website accessibility

On Private Mortgage Insurance

By Motley Fool Staff – Updated Feb 14, 2017 at 3:34PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The skinny on when to buy PMI.

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
  • Wachovia
  • Countrywide Financial
  • National City
  • Bank of New York
  • Wells Fargo

National City is a Motley Fool Income Investor recommendation.

None

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Wells Fargo & Company Stock Quote
Wells Fargo & Company
WFC
$40.41 (-2.67%) $-1.11
Capital One Financial Corporation Stock Quote
Capital One Financial Corporation
COF
$93.78 (-1.77%) $-1.69
The Bank of New York Mellon Corporation Stock Quote
The Bank of New York Mellon Corporation
BK
$40.17 (-1.86%) $0.76
WMIH Corp. Stock Quote
WMIH Corp.
WAMUQ
National City Corporation Stock Quote
National City Corporation
NCC

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.