If your down payment on a home is less than 20 percent of the appraised value or sale price, you must obtain private mortgage insurance, known as PMI, with your lender. This will enable you to obtain a mortgage with a lower down payment because your lender is now protected against any default on the loan. PMI charges vary depending on the size of the down payment and the loan, but they typically amount to about one-half of one percent of the loan. Mortgage insurance premiums are not tax deductible. Getting Rid of PMI? Keep track of your payments on the principal of the mortgage. When you reach 80 percent equity, notify the lender that it is time to discontinue the PMI premiums. The Homeowners Protection Act of 1998, which took effect in 1999, requires lenders to tell the buyer at closing how many years and months it will take for them to pay 20 percent of the principal to cancel PMI. Lenders must automatically cancel PMI when the balance hits 78 percent. The law does allow lenders to continue requiring PMI all the way down to 50 percent equity for so-called high-risk borrowers. Traditionally, those loans that are considered riskier include reduced documentation loans, in which customers provide less proof of income and other information during the approval process. Loans for people with spotty credit histories and higher debt-to-income ratios also fall into this category. Additionally, some FHA loans require payment of PMI throughout the entire life of the loan. Ways to Avoid PMI Some lenders will waive the mortgage insurance requirement if the buyer accepts a higher interest rate on the mortgage loan. The rate increases generally range from .75 percent to 1 percent, depending on the down payment. The advantage is that mortgage interest is tax deductible. Using a "PiggyBack" loan: This program involves two loans and a 5% down payment. The 95% loan is financed with a first mortgage equal to 80% of the sale price, and a second mortgage for the remaining 10% of the sale price. The second mortgage has higher interest but since it applies to only 10% of the total loan, the monthly payments on the two mortgages are still lower than paying one mortgage with mortgage insurance. Plus, again, there is the advantage of mortgage interest being tax deductible. Here's an example. The cost involved for a "PiggyBack" loan is very similar to a standard loan, but it has many more benefits. Utilize our fast online application and a loan officer will give you a free analysis - No Initial Credit Check Required!