Buying a home has many hidden costs. Not only do you have to pay a mortgage each month, but you also must pay insurance and taxes. One type of necessary insurance is called "PMI." If you are a traditional borrower (through a private lender), then you will most likely need to pay this insurance. Putting down a large down payment will negate the PMI, so try to save up enough money to put down 20 percent if you can. Otherwise, you are basically throwing your money away to an insurance company. It is better to save up your money than have to pay unnecessary fees every month for several years.

Private mortgage insurance, or PMI, is extra insurance that a borrower must pay when the loan-to-value ratio of the home is over 80 percent. This insurance is required by the lender in case the borrower defaults on the mortgage loan. Lenders prefer to receive down payment amounts of at least 20 percent of the value of the home, because the borrower then is statistically less likely to default. However, once a borrower pays down at least 80 percent of the home's value, he no longer has to pay for PMI.

Step 1

Figure out your home's loan-to-value ratio, or LTV. Divide your mortgage loan by the appraised value of the property. For example, if your loan is for \$160,000 and the appraised value is \$200,000, then the LTV is 80 percent. In this particular example, you would be able to stop paying PMI since your LTV has reached 80 percent.

Step 2

Look at the lender's chart to find out the PMI rate. Each lender sets its own rates. For example, let's say the PMI rate for a 30-year loan and an LTV of 80 percent is 0.32 percent.

Step 3

Multiply the PMI rate by the loan amount. For example, 0.0032 multiplied by 160,000 equals \$512 a year.

Step 4

Divide the annual PMI by 12 to get the monthly PMI. For example, 512 divided by 12 equals \$42.66 a month.

Tips

* Call your lender when your LTV reaches 80 percent to find out if you can cease PMI payments.

Reference

* Daily Interest: How to Calculate PMI [http://www.dailyinterest.com/library/PMI/How_to_calculate_PMI.html]

Resource

* FRBSF: Private Mortgage Insurance (PMI) [http://www.frbsf.org/publications/consumer/pmi.html]