A new Congressional proposal would eliminate one of the distinguishing features of a (US) mortgage: the mortgage interest tax deduction. Critics of the deduction have long argued that it deprives the federal government of much-need revenue, that it contributes to home-price inflation, and that it doesn’t do much to spur home ownership. As a result, the consensus is that an alternative system needs to be legislated into existence, and it must be equitable, effective, and efficient.

Towards those ends, the Wyden-Gregg bill, which is currently working its way through the system, would either completely do away with, or scale back the deduction that many homeowners currently claim when filing their taxes. One proposal would impose a maximum income constraint of $250,000 on would-be filers, in order to address the concern that the deduction primarily benefits the wealthy. Another proposal would replace the annual tax deduction with a one-time homebuyer tax credit, amounting to perhaps $10K. Rest assured, however, since the bill doesn’t have much support – given current economic conditions – and it seems unlikely that the deduction will be phased out any time soon.

For the time being, then, you can still deduct interest on the first $1 million of mortgage debt, as well as all of your property taxes, for up to separate residences. (That’s $1 million all together, not each). In addition, you can also deduct interest costs on up to $100,000 for a home equity line of credit. For now, you can also deduct private mortgage insurance (PMI), but only if you bought your house  in 2007 or later. Property taxes – but not homeowners insurance – are also deductible. As with any aspect of the tax code, the mortgage interest tax deduction is much more complicated than you think, and there are a handful of conditions that must be met before you can claim it. The most important one is that you itemize when filing your taxes. For more information, refer to the IRS website, and review the flowchart below.

If you are in the process of buying a home (and obtaining a mortgage), you can use our Real Estate Tax Benefits Calculator to estimate the savings associated with deducting your mortgage interest. Basically, the calculator will multiply your marginal tax rate by your estimated annual mortgage interest (as well as PMI and property taxes) to determine how much you will save as a result of the deduction. Given the uncertainty surrounding this perk, however, you would be wise to treat the savings as a gift, and not try to apply all of it towards a more expensive mortgage.

As the name of our website implies (and as the #1 Google ranking confirms), we are THE online source of mortgage calculators. Unfortunately, there isn’t enough space in this post to explore all 22 of our mortgage calculator tools, so I’ll focus on one in particular: Home Affordability Calculator.

The purpose of this calculator is to help you figure out the maximum that you can borrow, under a given set of loan parameters. Many borrowers begin the process by trying to find the home of their dreams, and then worrying about if/how they will afford to repay the mortgage associated with it. A better (or at least more conservative) approach, would be to begin by using the Home Affordability Calculator to determine a reasonable borrowing amount, and then go out and look for a home.

The first input in the calculator is your estimated down-payment. If you already have an idea as to a down-payment (which will come from your savings, and not from the loan), you can key it in here. For those of you just beginning the process, you probably won’t have a strong idea of what kind of down-payment will be expected of you. For a conventional mortgage, 20-25% is the standard, while FHA loans typically require only 3.5-5%.

Next, estimate your interest rate. Again, for those just starting out, this will probably be impossible, especially if you aren’t even aware of prevailing market rates. You can find information on regional interest rate levels from the weekly Freddie Mac Primary Mortgage Market Survey. Given that interest rates fluctuate over time and that you may have to pay a higher rate if your credit isn’t perfect, it’s a good idea to be conservative when estimating your rate, perhaps by adding .5% onto an “average” rate [Note: it is assumed that points, which are used to "buy down" the interest rate will come out of your pocket, and hence are not included in the calculation. The same is true for closing costs. Some loans allow you to finance your points, but that is beyond the scope of this calculator].

Length refers to the duration of your mortgage. 30 years is standard, although 15 years is also an option. Estimated front ratio refers to the percentage of your gross (after-tax) income that your PITI (mortgage principal, interest, taxes, and insurance) will represent. The estimated back ratio refers to the percentage of gross income that all of your debt (mortgage, auto loans, credit cards, etc.) represents. Unless you have reason to believe otherwise, you can assume a 28/36 (front/back) ratio, which means that your PITI cannot exceed 28% of your gross income, and all debt (including PITI) cannot exceed 36% of income.

The next step is to enter all of your gross (after-tax) income into the income fields. You should include the income for all parties who will be listed on the loan documentation. The same goes for the debt fields. [Note that you cannot exclude the debt of one of the parties without also excluding his/her income]. This data will be used in conjunction with the ratios to determine how much you are ultimately eligible to borrow, so it’s important to be accurate and truthful.

Then, enter in estimated property taxes (usually expressed as a percentage), as well as homeowner’s insurance, and private mortgage insurance (PMI) which is paid both upfront and annually by high risk-borrowers (i.e. those whose down-payments are less than 20%) to mitigate against the risk of default. If your projected down-payment exceeds 20%, you can leave this field blank.

Finally, click the calculate button, and you will be provided with the maximum that you will be allowed to borrow under the parameters you entered. You can play around with the loan parameters (i.e. increase the down-payment size, change the loan term) and watch the results change accordingly.

It is important to remember that this represents an estimate only. When it actually comes time to obtain your loan, most of the inputs will probably be different from what you originally assumed, so it’s important to be conservative. Last, this formula is designed to show how much you are eligible (the maximum that the bank will lend you) to borrow, and not necessarily what you can afford to borrow. If the housing bust has taught us anything, it is that the gap between these two figures is often larger than most borrowers initially estimated. Plan accordingly, and be conservative!

For anyone who has done some preliminary research into obtaining a mortgage, you have probably come across the “good faith estimate [GFE].” Anyone who has actually gone through the process of obtaining a mortgage, meanwhile, knows there isn’t a more ironic concept than GFE, and is probably chuckling right now.

The GFE was originally intended to help consumers shopping for mortgages, by giving them an upfront estimate of what they could expect to pay for a mortgage issues by a given lender. Over the years, however, the GFE has been abused by not a small number of lenders and turned into a deceptive marketing tool. While some lenders made a sincere effort to accurately estimate closing costs for potential borrowers, anecdotal evidence suggests that the majority realized that this would make them less competitive, since their peers were quoting ridiculously low fees, in the secure knowledge that there would be no recourse (legal or otherwise) for the borrower, if they raised the fees at closing time. Basically, the GFE became yet another variation on the “bait and switch” scheme.

Congress’s latest effort to rectify this contradiction will certainly make it much more difficult for lenders to operate in this way. As part of the Real Estate Settlement Procedures Act, which went into effect Jan. 1, lenders will now be contractually obligated to offer a good faith estimate within 72 hours of receiving the borrower’s application. In addition, the estimate must really be in good faith, and lenders are prohibited from tampering with certain fees later on. The table below, courtesy of USA Today, contains an excellent summary of these restrictions.

As part of the legislation, lenders will furnish the GFE using a standardized form, so that borrowers can easily shop around and compare loans from different lenders.

The first page states how long the information is valid for, along with a summary of the loan characteristics — such as the initial loan amount, the loan term, the initial interest rate, whether the rate can rise and if the loan has a prepayment penalty or a balloon payment. It also discloses whether an escrow account is required for the loan and an estimate of settlement charges. The second page breaks down origination costs and settlement charges. The third page explains which charges can and which can’t increase at the time of settlement, as well as which ones can only increase by a maximum 10%. The bottom of the third page serves as a worksheet for borrowers to compare options.

This table should make it easier for borrowers to compare different types of loans, as well as to determine if lenders are compensating for lower settlement costs with a higher interest rate, and vice versa.

Thanks to the amended Truth in Lending Act, which went into effect over the summer, borrowers must wait at least seven days after receiving this GFE before they can close on the loan. “Additionally, if the final APR rate is off by more than .125% from the good-faith estimate, then borrowers MUST wait another three days before closing.” Of course, if the borrower locks the rate with the lender, then a change in the final rate (unless previously warned by the lender in writing) would constitute fraud, and the borrower could petition for redress.

At the same time, there are still gaps in the process that aren’t addressed by other law. First of all, the GFE still doesn’t make it clear to lenders that they can shop around for the best deals on specific line items, such as title insurance, home inspection, etc. Many borrowers will probably still be tempted to simply compare the overall costs when choosing between two lenders, rather than such individual line items. In addition, the GFE forms don’t include an estimate of the borrower’s expected monthly payment under the parameters of the loan, potentially introducing a loophole for lenders to tinker with the numbers. Finally, it doesn’t specify what funds borrowers will need at closing.

Overall, though, it represents a vast improvement over the old system, and borrowers can now rest assured that the final costs won’t differ much from the initial estimates.

Perhaps the majority of borrowers obtain mortgages with a partner, or co-signer. Despite this, there is a tremendous amount of uncertainty regarding rights, responsibilities, etc. when more than one borrower is involved.  Allow me to offer some clarity.

First, let’s review the terminology. Co-borrowing refers to the issuance of a mortgage loan to two (or more) borrowers, both of whom share equal (legal) responsibility for fulfilling the terms of the loan. If they are not relatives, co-borrowers must cohabit the property that is being mortgaged. If related/married, it doesn’t matter whether they live together. Co-signing, meanwhile, refers to a situation in which a third-party “vouches” for the primary borrower(s); while it is understood that the co-signer does not bear primary financial responsibility for repaying the loan, he still will be held legally liable in the event of default. Anyone – relative, friend, etc. – can co-sign a loan for someone else.

In most cases of co-borrowing, the lender will use the lower credit score to determine the terms of the loan. This can become awkward, if one of the borrower’s scores is vastly higher than the other. While one might be tempted to simply drop the borrower from the loan application altogether (to prevent the bad credit score from affecting the loan terms), this will also reduce the amount of income that the borrowers can claim, and hence lower the amount of funds that they can borrow. The only solutions to this problem are to either go ahead and drop the borrower’s name (if you can afford to do so), or to petition your lender to use the credit score associated with the higher-income borrower (this assumes that the higher-income borrower also boasts the higher credit score).

The main pitfall of co-borrowing is a separation/divorce prior to the maturity of the loan. Again, this can become awkward, especially if such a contingency agreement wasn’t drawn up in advance. For that reason, all co-borrowers are encouraged at the time of obtaining the mortgage to draw up plans for resolving such a situation. It should account for both the possibility of a sale, as well as the alternative possibility that one borrower will continue to reside in the property. Under a sale, borrowers should determine how proceeds will be distributed. Without a sale, it must be determined (ideally in advance) whose responsibility it will be to repay the mortgage and how the borrower who continues to live in the house will compensate the borrower that no longer does.

Co-signing is also fairly straightforward when everything goes as planned. Bringing in a co-signer with a better credit score can not only boost one’s chances of being approved for a mortgage, but can also lead to better terms and a lower rate. The pitfall, of course, is the possibility that the borrower will not be able to fulfill the obligations associated with the loan, in which case the co-signer will be liable. The best way to guard against this possibility is to insist on the creation of a reserve fund (funded by the borrower and to be drawn from in a time of distress), and simply to only co-sign a loan for someone who you believe can repay the loan and/or you don’t mind assuming responsibility for if he can’t.

Not the most stimulating headline, I admit, but it’s a topic that deserves some bandwith. Let’s be honest: who out there even knows what a HUD 203(k) Mortgage is? Who’s first instinct (I’m guilty) was that it is an abstruse program that brings together 401K retirement accounts with mortgage financing? That’s what I thought.

Let’s get serious for a moment. A 203(k) is a HUD program that provides mortgage loans for the purchase of so-called “fixer-upper” properties. According to HUD,  203(k) mortgages serve a very important function because, “The purchase of a house that needs repair is often a catch-22 situation, because the bank won’t lend the money to buy the house until the repairs are complete, and the repairs can’t be done until the house has been purchased.”

Towards that end, the 203(k) allows the borrower to roll all of the costs of renovation into the mortgage. While these costs are theoretically uncapped, they must be estimated ahead of time. Further, it must be confirmed by an appraiser that the value of the home will increase at lease by these costs upon the work’s completion. In this way, those that might have otherwise been discouraged from buying dilapidated properties have an inexpensive source of financing (only 3.5% down, consistent with the FHA’s other mortgages).

There is also a new Streamlined 203(k) “Limited Repair Program, that permits homebuyers to finance an additional $35,000 into their mortgage to improve or upgrade their home before move-in. With this new product, homebuyers can quickly and easily tap into cash to pay for property repairs or improvements, such as those identified by a home inspector or FHA appraiser.”

The costs of these repairs, along with a “contingency reserve” of 10-20%, origination fees, and of course the purchase price of the property, are all rolled into the mortgage. Since it’s assumed that many of these properties won’t be of inhabitable condition until after the repairs are completed, the borrower also has the option of rolling 6 months of pre-payments (PITI) into the mortgage as well. Upon closing of the mortgage, the repair costs are deposited into an escrow. Withdrawing these funds can be tricky, however.

While FHA loans are effectively guaranteed by the government, they are originated and administered by private lenders. As one couple’s story illustrates, dealing with one’s lender is not always straightforward when it comes to the 203(k):

“As the contractors were hungry for work, we got started improving the property right away,” she said. “We had been told by our mortgage broker that we could expect the first draw against our $35,000 escrow 15 days after closing.”

As time passed, however, “we heard nothing from Bank of America, other then where to send our first mortgage payment,” she said.

For three months, the couple paid their mortgage, yet received no check for the work done so the contractors could be paid.

To pay for the work, “we have had to empty our savings and run up our credit cards,” she said. “We finally asked them to stop until we can find resolution with Bank of America.”

Unfortunately, borrowers who get the run-around from their lenders unfortunately don’t have much recourse, and can’t expect any help from the government. The best advice, then, is to make sure that the escrow is available to you start shelling out money for repairs. In fact, the raison d’etre of the 203(k) is to prevent the borrower from having to pay for repairs out of his own pocket. In hindsight, this couple would have been wise to heed this advice.

Given that mortgage rates are at record lows, many borrowers are urgently wonder whether they should execute a mortgage rate-lock. With this post, I will try to provide some clarity on this question.

Let’s begin with the basics. As implied by its name, a rate-lock is an agreement between borrower and lender that literally locks in a mortgage rate at a certain (most likely the current) level. Such an agreement will generally specify an interest rate, discount/origination points, and an expiration date. [As an aside, locking in an interest rate is not the same as being approved for a loan. According to the Federal Reserve, "A lock-in is not the same as a loan commitment, although some loan commitments may contain a lock-in. A loan commitment is the lender’s promise to make you a loan in a specific amount at some future time."]

Historically, lenders required legally binding commitments from borrowers before they would issue a rate lock. Nowadays, this practice is less common, since lenders have come to perceive that it puts them at a competitive disadvantage. As a result, lenders compensate for the possibility that a) interest rates will rise and/or b) the borrower will renege on the rate lock, by charging a small premium to execute the rate-lock. Most rate locks expire within 30-60 days; while longer time periods can be negotiated, you can generally expect to pay a higher premium for a rate lock that expires later.

There are a few things to keep in mind with a rate-lock. First, the agreement should always be in writing, since oral agreements would be possible to prove, if need be. Second, you should always make sue to lock the points as well as the interest rate; failure to do so would enable the lender to compensate for a rise in interest rates by charging more points, without violating the rate-lock agreement. In addition, try to approximate (with the help of the lender) when your loan can realistically be closed so that you select an appropriate time period of validity. On your end, make sure you do everything necessary to close the loan before the rate-lock expires. Finally, make sure you read the fine print. Some rate-lock agreements contain clauses that render the whole contract void under certain circumstances, while other lenders slip in language which allows them to charge a higher rate than initially agreed-upon, as long as it doesn’t exceed a certain cap.

By this point, you’re probably wondering: What’s the point of a rate-lock, anyway? While certainly you can successfully go through the process of obtaining a loan without bothering to lock in the rate ahead of time, it certain makes the process much smoother. Knowing the interest rate ahead of time allows you to calculate your exact monthly mortgage payment, and confirm that it falls within your budget. It also makes a very stressful process (obtaining a mortgage) that much less stressful, since you don’t have to worry about whether rates will change prior to closing.

As to whether a rate-lock is right for you, that’s a question that only you can answer. No one can predict interest rates, which means it’s equally impossible to predict whether an interest rate-lock will ultimately prove to be a wise decision. Consider, however, that interest rates are currently at record lows. While they could certainly drift even lower, the conservative assumption is that they can only go up from here. If even a slight uptick in mortgage rates would jeopardize your ability to close on the loan, a rate-lock would be a safe choice. If, on the other hand, you have a cushion built in, not locking won’t do any harm, but could leave you feeling stresses until your loan closes. For those of you who are somewhere in between, consider a rate-lock agreement with a “float-down” option, which protects you against rising rates while also giving you some of the upside from lower rates. While you will have to pay a premium for this additional feature, at least you won’t be kicking yourself if you signed an agreement and rates plummet.

US News & World Report just released its guide to the status quo of mortgages (Getting a Mortgage in 2010: 10 Things to Know). While the guide is fairly broad, it falls short on depth; I would like to summarize, simplify, and elaborate upon it below:

1. Tighter Lending Standards: Given the deteriorating credit positions of lenders, it’s no surprise that lending standards have tightened dramatically, to the point that it might now be impossible for certain parties to receive loans. Documentation has also become more strict. The days of “Liar Loans” are behind is. Instead, expect to provide verifiable proof of both income and assets, and expect that both will have to meet very rigid ratios, with very little leeway.

In addition, credit history should be impeccable (in the 730’s or above) in order to obtain a mortgage with the most favorable terms. As usual, borrowers should check their credit report in advance to make sure there aren’t any errors (you are entitled to view it free once per annum), and to scrub them accordingly. According to US News, 2010 could witness “additional belt tightening” as banks move to implement “sustainable” lending practices.

2. Lower Interest Rates: Behold one of the paradoxes of the housing market crash. While lending standards are tighter (to mitigate the perceived higher risk), lending rates are also lower (facilitating more risk taking). In other words, while lower interest rates would normally compel more borrowers to enter the market, many are simultaneously deterred because of tighter credit requirements. As a result, lending rates have continued to trend lower, following a brief uptick over the summer. They now stand at record lows.

Going forward, it seems rates must go up. The Fed’s asset purchase (known as quantitative easing) program is already winding down, and formal rate hikes probably aren’t far off. In addition, with investors nervous about the growing US national debt, they might curtail their purchases of Treasury securities, which would send Treasury yields up, and bring mortgage rates with them.

3.. Down Payments: Only a couple years ago, borrowers could purchase a house with zero money down. Not anymore. Nowadays, you should expect to put down at least 20%, which was standard before the housing bubble. FHA and other government-sponsored mortgage programs often carry less rigorous down-payment requirements, but carry higher interest rates to compensate for the additional risk. Either way, you will probably be required to obtain private mortgage insurance (PMI) if you want to put down less than 20%.

4. Government Loans and Incentives: Speaking of the FHA, it’s unclear how long its loans will be so readily available, due to its growing financial problems. It has already lowered the maximum loan amounts for reverse mortgages, and may do the same for conventional mortgages.

The other government program that you should be aware of is the tax credit for first time home-buyers. The credit has been extended until May, and most of the requirements have been loosened, to the extent that virtually all homebuyers can find some way to qualify.

Shamed from its failure to prevent the housing bubble and wary of being stripped of its regulatory powers by the still gestating Consumer Financial Protections Agency, the Federal Reserve is stepping into high gear. Six months ago, the amended Truth in Lending Act (TILA) officially went into effect, and followed this up last month with the implementation of new “Regulation Z” to this act.

For those of you unfamiliar with this enhancement in regulation, the amended TLIA mandated an increase in transparency in the mortgage application process. According to the Fed, this act “requires creditors to give good faith estimates of mortgage loan costs (”early disclosures”) within three business days after receiving a consumer’s application for a mortgage loan and before any fees are collected from the consumer, other than a reasonable fee for obtaining the consumer’s credit history.” Previously, these disclosure rules only applied to primary residences; now they apply to “all dwellings.”

According to the Fed, “Uniformity in creditors’ disclosures is intended to assist consumers in comparison shopping” and prevent them from feeling pressured to close a deal right away. Towards this end, borrowers MUST wait at least 7 days after receiving the initial good-faith estimate before they can close on the loan. During this period, they can thoroughly evaluate the lender’s offer and even consult with other lenders. Additionally, if the final APR rate is off by more than .125% from the good-faith estimate, then borrowers MUST wait another three days before closing.

If the original act was designed to increase transparency during the application process, then the new Regulation Z (which goes into effect immediately, but which lenders technically have 60 days to implement) should increase transparency after the mortgage has already been completed. Specifically, if the loan is sold or transferred to a new lender/investor/institution, then the acquiring entity has 30 days in which to inform the borrower of the change.

This regulation, while seemingly trivial, should address the massive uncertainty that has arisen over the last decade, as mortgages change hands at an increasingly rapid speed. Only recently, with the CDO fiasco, has the complex chain of mortgage lending that stems from origination to “packaging” to investing come to light. For the most part, borrowers are blissfully ignorant to this process; all they care about is to whom they should mail the monthly mortgage payment to. Only recently has this become a problem, as delinquent borrowers have sought loan modifications, but must first track down the current owner and obtain his permission before such is possible. As a result of the new rule, fortunately, the current owner’s identity will no longer be a mystery requiring the prowess of a homicide detective to unravel.

Overall, these regulatory changes do essentially nothing to prevent a repeat housing bubble from inflating. Still, that they increase the transparency of the system is laudable in its own way. Borrowers can no longer complain that they weren’t given adequate time to consider a mortgage offer, or that the original good faith estimate differed drastically from the final numbers, or that they don’t know who owns their mortgage. If knowledge is power, than borrowers now have some muscle!

It seems mortgages are no longer just for regular folks. So-called Jumbo Loans have witnessed a surge in popularity over the last decade, thanks to the same explosion in easy credit that also made conforming loans easier to get. Still, these loans are relatively rare, especially in the current lending environment.

Before I go any further, I want to clarify the distinction between conforming and jumbo mortgages. The distinction is made solely in regards to loan size, for no other reason than loans above a certain (some would say arbitrary) threshold are considered more risky. The exact thresholds vary by region, in accordance with local housing price levels. In the majority of cases, the limit for a conforming mortgage is $417,000, while in Los Angeles, for example, it’s $729,750. Anything above must be financed using a jumbo mortgage.

You should be aware of this distinction when shopping for a home. If possible, you should plan/negotiate to purchase a home below the cutoff, in order to make the financing process easier, as I’m about to explain. The first thing you will notice when shopping for a jumbo loan is that they are mostly adjustable rate loans. When interest rates are low (as they are currently), that can work to your advantage. When they rise, however, this will make your already expensive mortgage even more expensive. Second, down-payment standards are more rigid; in order to obtain a jumbo mortgage, you should be prepared to contribute at put down at least 20% in equity. Compare this to the 3.5% that is required with FHA conforming mortgages.

In addition, lending standards for jumbo loans are generally more strict. You will most likely be rejected if your projected monthly mortgage payment exceeds 38% of your income. Your credit history should be stellar, and you will be required to thoroughly document your income and assets when applying. Those who were hoping to obtain a Liar’s Loan need not apply. Finally, mortgage interest on jumbo loans can only be deducted on the first $1.1 million (recently revised by the IRS from $1 million). I shouldn’t broadcast this, but tax experts have found ways to get around this, usually by pooling mortgage interest with other investments.

While precise figures on jumbo mortgage lending are hard to come by, it seems there are 130,000 currently outstanding mortgages with loan balances of more than $1 million. 3,000 of these loans have balances of more than $3 million, and a handful over $20 million. Interestingly,these mortgages are plagued by the same rates of default as effect conforming mortgages. At the end of the day, I guess the super-rich are just as prone to poor financial decision making as the rest of us…

Based on feedback from our readers, it seems the only thing most borrowers understand about Private Mortgage Insurance (PMI) is that without it, many of them would be denied mortgages. While for many borrowers, this is indeed the case, it’s important to be aware of the other options that exist.

First, let’s start with the basics: what is PMI? As implied by the name, PMI is literally an insurance policy on your mortgage, which protects the lender in case of default. Typically, PMI is required on mortgages with a loan-to-value of greater than 80% (i.e. when the down-payment is less than 20% of the value of the mortgage). The insurance is calculated as a percentage of the the total mortgage value, and is rolled into the monthly mortgage payment.

PMI is not cheap, and will average about $1,000 per year on a $200,000 mortgage. Generally speaking, insurance premiums for fixed-rate mortgages are lower than for variable-rate mortgages. In addition, long mortgage durations (30 years, as opposed to 15 years), and high loan-to-value mortgages are associated with higher PMI premiums. This is to be expected, since mortgages with these characteristics typically have higher default rates.

One alternative to making monthly PMI payments is to roll a one-time premium into the mortgage. Thanks to current tax rules (mortgage interest is tax-deductible, while PMI premiums are not), it will be cost-effective for the average borrower to do so. Unfortunately, most borrowers are not aware of this possibility, because lenders require special authorization to process it and hence avoid mentioning it to prospective borrowers. Finally, while such a strategy will technically raise the size of your mortgage, some (or even most) of this premium will be rebated to you when it is determined that you no longer need it.

Speaking of which, mortgage insurance is only a temporary outlay. After your loan-to-value ratio exceeds 80%, you will no longer be required to pay for it. This is natural, since if your loan-to-value ratio had been this high when you first obtained the mortgage, you wouldn’t have been required to purchase PMI.  In fact, thanks to a law passed in 1999, lenders must take the initiative to cancel the mortgage insurance agreement when the LTV falls below 78%, based on the initial appraised value of the home. Borrowers are also entitled to early cancellation (though, you must request it), if your equity exceeds 25%, based on a current appraisal of the home.

As I mentioned, private mortgage insurance is quite expensive, and hence not-at-all desirable. This is because the mortgage insurer is selected by the lender – not by the borrower – which doesn’t have as much of an incentive to cut costs. Accordingly, it might be economical to pay a higher interest rate in lieu of PMI, if your lender offers you such an option. The best approach is to simply (save up until you can afford to) make a higher down-payment, such that PMI is no longer necessary.