When making a down payment of less than 20% most conventional mortgage lenders require private mortgage insurance (PMI). This insurance protects the lender in the event of a foreclosure where the home sells for less than the outstanding mortgage. There are several companies which offer PMI and most lenders obtain coverage from one or more of these companies.

There are several different types of PMI and each bank can set their own coverage requirements. Without getting technical, you should ask the following questions:

1. Will I be required to pay PMI?
2. What is the amount of PMI I will be paying monthly?
3. How many months of PMI will I be required to pay at closing?
4. Is there a minimum number of years required before I can request the PMI be dropped?
5. How much equity must I have in my home for me to drop the PMI? (Most lenders will require you to pay the cost of a new appraisal to determine if you're eligible. This cost can vary from $250 to $300 at today's price.)
6. Is any of the PMI I pay at closing refundable to me if I become eligible to drop the PMI?

When comparing two or more lenders with the same rates and equitable fees, your decision may come down to PMI.

There are lenders who offer No PMI loans with 10% down, but do your financial calculations. Some lenders may "self insure" the loan and charge you a higher rate of interest. Other lenders will offer a conventional mortgage up to 75% of the purchase price along with a 15 Year Fixed Home Equity loan for the remaining 15%. While either option offers you a tax benefit on the increased mortgage interest you will pay, your monthly expense may be higher and the opportunity to refinance the loan if rates drop may be limited. Talking with a financial planner or accountant is your best option when considering these types of loans and you will need to make some assumptions on your future housing plans. Paying $50 more a month to save $25 in taxes just doesn't make sense!

How long do I have to pay PMI?

Prior to 1999, the only way to eliminate the payment of private mortgage insurance was to refinance your loan and have at least 20% equity. Federal regulations now provide two methods for the elimination of PMI on most loans. If your home has sufficiently appreciated in value such that your loan balance represents 80% or less of the current market value, you can request that the lender drop the PMI requirement. The current value is determined by an appraisal, performed by the bank, at your expense. The cost of the appraisal will normally range from $200-$300. The PMI requirement will automatically be dropped when the loan balance is 78% of the original purchase price. When home values are rising, PMI can be eliminated in as little as one to two years. Before requesting a bank appraisal, you may want to consult your realtor to determine the price range for homes similar to yours that have sold and closed within the past six months. Before you apply for a loan, you should ask your lender about their policy on PMI elimination.