What is PMI? PMI, or private mortgage insurance, is an insurance that home buyers are required to purchase if their down payment is low. Private mortgage insurance is usually required of home buyers whose down payment is 20 percent or less of the property's sale price or appraised value. This insurance was created by private mortgage insurers to provide protection for the lender in case the home buyer defaults on the loan.

The cost of private mortgage insurance varies according to the down payment and mortgage loan, but it typically equals approximately half of one percent of the total amount of the loan. But how exactly is private mortgage insurance calculated? Let's assume you bought a house for $100,000, for which you put set down a 10 percent down payment. Your lender will multiply the remaining 90 percent by .005 percent. The result, $450, is your annual private mortgage insurance, which is divided into monthly payments.

Eventually, when you have 20% equity in your home, your private mortgage insurance can be canceled. In 1999, a new law, the Homeowner's Protection Act, was passed that requires lenders to notify you, the buyer, how many months and years it will take for you to pay 20% of your principal. This same law, however, allows lenders to make certain high risk borrowers continue their private mortgage insurance, all the way to 50 percent equity. Some FHA loans may even require that home buyers acquire Private mortgage insurance for the lifetime of the loan.

If the idea of paying private mortgage insurance for years sounds unappealing, you're not alone. Over the years, new ways of avoiding payment of the private mortgage insurance, even without the 20% down payment available, have emerged. One strategy commonly employed to avoid paying private mortgage insurance is to pay more interest on your mortgage loan. Some lenders will waive the private mortgage insurance requirement if the home buyer agrees to pay a higher interest rate.

Another way to avoid paying private mortgage insurance is by using the 80-10-10 loan strategy. This strategy involves taking on two loans and putting down a 10 percent down payment to purchase a home. One loan finances 80 percent of the mortgage, while the second loan finances the remaining 10 percent of the sales price. The second mortgage-the one that covers the 10 percent-has a higher interest rate. But since the amount of the loan is low, the interest charges are relatively easy to pay off. Under this plan, the mortgage interest is also tax deductible.

You may also be able to cancel your private mortgage insurance if you can prove that your home has increased significantly in value. If the value of your home has gone up, you may already have 20 percent (or more) of the equity you need to cancel your private mortgage insurance. You can submit evidence of this to your lender, but the process is slow. Expect to wait up to two years for the lender to make a decision.

Also, as a friendly reminder, May 10th is the deadline here in Indiana to file your mortgage and homestead exemptions with the County Auditor to be applied to the following year's taxes. If you purchase a new property, both need to be filed. If you refinanced your mortgage in the last year, a new mortgage exemption must be filed. If you have not done so already, do it. It will save you a significant amount of money.