What is PMI? Do I I have to pay it?

Many homebuyers are confused by private mortgage insurance, better known as PMI. That's understandable; PMI is a pretty arcane addition to your mortgage loan. But here's what you need to know: PMI doesn't protect you. It protects your mortgage lender. And if your down payment isn't large enough, the odds are high that you'll have to pay for this insurance. PMI provides your lender with financial protection in case you default on your mortgage payments. If your down payment on the home you are buying is less than 20 percent of the residence's appraised value or sales price, you will have to pay for PMI. How much you pay will vary depending on how large your down payment is and how much mortgage money you are borrowing. Usually, though, you can count on paying from 0.3 percent to 1.15 percent of your original mortgage loan amount every year for PMI. For a loan amount of $150,000, that comes out to $450 to $1,725 each year. This annual payment is broken up into your 12 monthly mortgage payments. So each month on that $150,000 mortgage loan, you could expect to pay from $37.50 to $143.75 for PMI. Most homeowners don't like paying PMI. That's understandable. But consider this: Without the financial protection that PMI offers them, more lenders would be unwilling to give more borrowers a mortgage loan. It helps, then, to think of PMI as a necessary evil. Without it, a smaller number of consumers would be able to qualify for mortgage dollars. And here's some good news: When you have paid off enough of your mortgage loan so that you have 20 percent equity in your home, you can tell your lender to discontinue your PMI payments. Federal law states that your lender itself must automatically cancel your payment when your loan-to-value ratio falls to 78 percent. You do have to be careful, though. If you take out a mortgage loan insured by the Federal Housing Administration -- better known as an FHA loan -- you might have to pay PMI for the life of the loan. Be sure to check with your loan officer on your PMI options before taking out a mortgage loan.