If the downpayment on your home loan is more than 20% of the home's value, your home is the loan's only collateral. If, however, your downpayment is less than 20%, the lender will also require that you purchase private mortgage insurance (PMI). PMI protects the lender if you default on the mortgage.
Payment of PMI works in one of three ways:
1. You pay an upfront fee of about 0.5% of the loan. After that, you usually pay an annual fee of one-third of 1% per year.
2. You don't pay anything upfront, but your monthly payment is higher to make up for that fact.
3. The lender pays the PMI. Under lender-paid mortgage insurance (LPMI), the lender pays the insurance in exchange for you accepting a higher interest rate on the loan. (Ask your lender to run the figures both ways--PMI and LPMI--to see which would cost you less.)
If you got your mortgage after July 29, 1999, your lender is required by law to discontinue your PMI payments after you have paid off 22% of your principal (provided you always pay on time). Most lenders will allow you to discontinue PMI once you have paid off more than 20% of the original loan amount. If you think you have met the 20% payoff of principal requirement, ask your lender if your PMI can be dropped.
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