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Private Mortgage Insurance
When buying a new home, if your down payment is less than 20 percent of the appraised value or sale price, you must obtain private mortgage insurance (PMI) through your lender. This protects your lender against you defaulting on the loan, and it will enable you to obtain a mortgage with a lower down payment.
Most homebuyers need PMI because 20 percent of the sale price on a home is a lot of money; for instance, that's $20,000 on a $100,000 home. The cost of PMI varies depending on the size of the loan and the down payment. In general it amounts to about one-half of one percent of the loan. In addition, mortgage insurance premiums are not tax deductible.
Once you reach 80 percent equity, you do not have to pay PMI premiums anymore. Keep track of your payments on the principal of the mortgage, and notify your lender when it is time to discontinue the PMI premiums.
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