What Is It?

• Another name for primary mortgage insurance is private mortgage insurance, or PMI; the acronym is the same for both. Primary insurance covers the first position loan on a property; normally, it's the largest loan. It is necessary when the purchaser doesn't have 80 percent of the value of the home as a down payment and needs protection from default. The PMI insurance guarantees the first 20 percent for the lender, so if you default on the loan, the insuring company covers any part of the 20 percent the lending agent didn't receive when he sold the home.
  
  

Qualifications

• Fannie Mae, the Federal National Mortgage Association, sets the qualifications for the PMI . The property you purchase must be a residential property transaction, have a deed of trust or mortgage, be a single family dwelling and the primary residence, and the loan purpose must be either for refinancing, initial construction or initial acquisition. The loan amount also must be under $252,700.
  
  

Cost

• The cost of PMI insurance varies according to the amount of the down payment and the mortgage itself. If you only put 10 percent down on a 30-year adjustable rate mortgage, it might be slightly higher than 1/2 percent of the original loan. If you only put 5 percent down, the annual payment might be as high as more than 3/4 percent of the original loan per year, with 15 percent down dropping to a little more than 1/3 percent annually. After 20 years, the premium drops to 0.2 percent, regardless of how much you put as a down payment (See the link in the resources).
  
  

Payment

• Most of the time, the cost of PMI insurance is part of the cost of the loan; the mortgage provider collects the next year's premium by dividing the cost of the insurance by 12 months. The mortgage company then collects the monthly premiums and puts them into escrow for next year's payment.
  
  

Expense

• If you pay down the cost of the mortgage below 80 percent of the value of the home, or it appreciates beyond the 80 percent, often you can request that the company drop the insurance and save you the monthly cost ; sometimes they refuse to do that until you've paid several years on the home. In this instance, refinancing is in order, which lowers payments because of the money saved by not paying the premium.
  
  

Avoid or Remove

• Some mortgage companies underwrite home equity loans while at the same time creating a home loan that is less than the 80 percent of the initial cost . If you purchase in a rising market, a quick refinance might help to remove the PMI insurance and lower the payment.