PMI benefits the mortgage lender, but you pay the premiums. And unlike virtually any other insurance policy you buy, you don't get to shop around for the best deal. The cost varies depending on your credit score and down payment, but it typically ranges from 0.3 percent to 1.5 percent of the original loan amount every year. So if you borrow $300,000, you're paying between $900 and $4,500 annually: That's not chump change. As I said above, PMI is typically required unless you have at least 20 percent equity in your home, also known as an 80 percent loan-to-value ratio. For example, if your home is worth $100,000 and you owe $80,000, you have an 80 percent LTV and 20 percent equity. There are three ways to achieve the magic number: Put 20 percent down when you buy your home. Make payments until you've paid off enough of your mortgage to achieve 20 percent equity. At today's rates, this will take about 10 years of minimum payments on a 30-year mortgage. Your house appreciates in market value to the point that your loan-to-value ratio drops to 80 percent or less. PMI is typically bundled with your regular monthly mortgage payment, so unless you're on the ball, you'll forget you're paying it. This used to be pleasant for those collecting the premiums, because until the passage of the Homeowners Protection Act of 1998, they didn't have to let you know that you'd achieved 20 percent equity and no longer had to pay PMI. Instead, they'd collect your PMI premiums every month for the entire 30 years if you let them.
