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Private Mortgage Insurance (PMI) is expensive insurance that protects the lender if you foreclose, not you but you have to pay for it. It is required if you put less than 20% down when you purchase a new home, unless you can prove that your total equity is equal to or exceeds 20% (22% FHA).

The insurance isn’t cheap. The borrower will have to pay .50% to 1.50%, on the amount financed, however it is tax deductible if you make under a certain amount. The premium will vary depending upon amount borrowed, term and if FHA. So if you finance a $150,000 mortgage, and your PMI costs 1%, then your monthly premium is $150 per month, or $1,800 per year.

If you rent for as long as possible and save to put down 20%, then you will not have to pay PMI, but if you put less down, you don’t have to pay PMI forever. When you make mortgage payments, some of your payment goes to principle, and maybe your home will appreciate in value.

When your equity equals or tops 20%, then you can drop PMI. If you have a conventional mortgage, you need to get a certified appraisal. Go to BankRate to see the 9 steps to drop it. I understand if it is FHA once you have 78% equity, the PMI automatically drops, but this only takes into consideration your loan terms and payment you make, including extra amounts, but not appreciation.

It is kind of a hassle to drop it, but the monthly savings is worth it.

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