Private mortgage insurance is usually required by your lender if your mortgage amount totals more than 80 percent of the fair market value (FMV) of your home.
The simplest solution is to pay 20% down, right? Well, it is a simple answer, but often an unreasonable one for the average homebuyer. However, there other options available to you. One common option is an "80-10-10" loan, available from some lenders. Lenders are open to this because they don't profit much from the PMI payment, they only use the dollars to protect themselves from the risk of you defaulting.
Therefore, many lenders have no issues presenting alternatives that allow for the elimination of PMI. If you have the money for a ten percent down payment, 80% of your home's value can be placed in the first mortgage, allowing you to skip the PMI payment. The remaining ten percent comes from a second mortgage, usually financed from another lender. This second mortgage will be at a slightly higher interest rate, but if the terms are reasonable, you will save money.
This is the option I've used myself, for a home that was purchased in December of 2007. So, don't let anyone tell you they don't exist...just find the right mortgage broker. See our related article, "what is an 80-10-10 mortgage loan?"
A less common solution, but one that might save even more...
Borrow from a lender that has a "self-insured" first mortgage program. You will rate that's a bit higher than a normal mortgage, as the lender then uses this additional interest to offset the higher risk of you defaulting on the loan. Be sure to compare this approach with the 80-10-10 approach described above, as if often saves more money.
As you consider these options, keep in mind that you shouldn't have to pay PMI for the full life of the loan. When you reach the mark where the loan covers 80% of the fair market value (FMV), you no longer need PMI. Since FMV isn't fixed, and home values rise in many areas, you could stop PMI payments early. Also consider that the additional interest you pay in either the 80-10-10 scenario, or the self-insured scenario is tax-deductible.
A reputable mortgage broker should be able to run the numbers for both options for you. Be sure to ask them to look at both the pre-tax, and post-tax savings.