Private mortgage insurance is insurance that protects lenders, not homebuyers. If you put less than 20 percent down on your home buying purchase, you should expect PMI. That might sound like a bad thing—and to be honest, it can be. But there are positive things about PMI, too. And even if you're trying to avoid it, sometimes you have no option but to take out a PMI policy.

What Is Private Mortgage Insurance (PMI)?

PMI, or private mortgage insurance, is a form of insurance that supplements a conventional loan that protects the lender in the case of a default on the borrower's loan. There is a requirement If the buyer places less than 20% of the purchase price as a down payment, PMI is usually required.

Lenders require PMI to protect their investment if you default on your loan and must sell the house at a loss. However, if you put down 20% or more, lenders usually won't require PMI because they feel comfortable that they'll recover some of their losses if you default.

There are two types of PMI: lender-paid and borrower-paid. The lender arranges and pays Lender-paid PMI as part of your monthly payment, but you usually pay a higher interest rate on them; borrower-paid PMI is paid by you as an additional amount each month to pay off the cost of coverage over time.

How Do You Pay For PMI?

The cost of private mortgage insurance can be added to your monthly payments. PMI can stop when loan principal drops below a certain target.

When you refinance and take out a new loan, the lender may require you to pay off your PMI. However, this is not always the case.

If you want to avoid paying private mortgage insurance during the life of your loan, you can try for one that doesn't require it.

What Factors to Consider With PMI?

Here are some factors to consider when determining whether or how much private mortgage insurance to use:

Your down payment percentage. The higher your down payment, the lower your risk of defaulting on your loan, so PMI is not typically required if you put 20 percent or more down on a home. However, if you put less than 20 percent down, PMI will likely be required for most conventional loans.

The type of loan you get and its interest rate. A fixed-rate loan has an interest rate that doesn't change over time and typically requires less PMI than an adjustable-rate mortgage (ARM). An ARM is based on an index such as LIBOR, which can increase or decrease according to market conditions; this makes them riskier for lenders because they have less protection against foreclosure if rates go up unexpectedly or if homeowners can't refinance into a lower rate when their ARM resets.

How To Get Rid Of PMI?

There may be a few reasons you don't want to pay private mortgage insurance (PMI) on your home. The two main reasons are:

You can't afford it.

It's not tax-deductible for you.

If either of these reasons applies to you, here are some ways to get rid of PMI so you can save money and increase your net worth.

If you're paying PMI, you may be able to get rid of it. Ask your lender if they offer any programs that can help you eliminate PMI sooner. If you've got a steady enough income and good credit, they might be willing to give you a break on the premiums or even eliminate them. If not, there are other options available to help you get rid of private mortgage insurance as soon as possible:

Refinance: Refinancing is one of the easiest ways to get rid of PMI quickly. When you refinance your current loan with another lender, the new mortgage will usually come with lower interest rates and better terms than the original loan did. You'll probably save money on interest payments over time by refinancing, which could help you pay off your debt faster than expected and ultimately get rid of private mortgage insurance sooner than expected.

Increase your down payment: If you can't afford to refinance or make larger monthly payments, increasing your down payment can help significantly reduce how long it takes for PMI to disappear from your monthly finances.

Pay off your loan faster: One way to pay off your loan more quickly is to make biweekly payments rather than monthly.

How To Calculate PMI?

Your monthly PMI payment will depend on how much money you owe and what type of home loan you have. The higher your loan amount or, the lower your down payment percentage, the more expensive your monthly PMI payment will be.

The Decision to Pay PMI Or Not

There are no hard or fast rules for getting rid of private mortgage insurance. There are just guidelines that need to be followed, and in some cases, you'll need to weigh your options carefully before deciding. Whatever you decide, just note that this is something that you'll want to get off your plate as soon as possible, if for no other reason than because it may not be tax deductible. After all, paying PMI isn't exactly the best feeling in the world.