If you are buying a new home without the traditional 20% down payment, your mortgage payment may include private mortgage insurance, or PMI. Private mortgage insurance is a supplementary insurance required by lenders if a borrower obtains a loan for more than 80% of the home's value.

Even though PMI will increase monthly mortgage payments, this extra insurance is intended to protect lenders against defaults. Moreover, it also allows buyers to purchase new homes with as little as 3% down.

Without private mortgage insurance, many people would be unable to buy a home. Thus, private mortgage insurance also benefits homebuyers. Saving money for a large down payment can be difficult, especially with rising home prices. If purchasing a $250,000 home, a 20% down payment would amount to $50,000. By means of PMI, this same home can be purchased with a $7,500 down payment.

Private mortgage insurance payments are included within monthly mortgage payments. The cost of PMI varies. Homes purchased with a sizeable down payment have lower private mortgage insurance premiums.

On the other hand, monthly premiums on mortgages with 100% financing can be costly. On average, PMI payments range from $45 - $97 per $100,000. Naturally, homebuyers without a 20% down payment seek ways to quickly eliminate private mortgage insurance.

Here are a few ways to remove private mortgage insurance.

Accept Higher Interest Rate: Homebuyers with a 3% or 5% down payment can avoid private mortgage insurance by accepting a higher rate on their mortgage loan. Rate increases can be as much as 1 or 2 percentage points. Interest rates influence mortgage payments. Thus, a higher rate could have an effect on loan approval. For example, if a buyer barely qualifies for a $150,000 mortgage loan with a 6% interest rate, the slightest rate increase will affect affordability. In this instance, homeowners can opt to purchase a less expensive property and avoid PMI, or accept a lower rate and pay PMI.

80-20 Mortgage Loan: Commonly referred to as the piggyback loan, this loan option offers multiple variations. Buyers can obtain a first mortgage for 80% of the sale price, and a second mortgage for the outstanding 20%. Because the first mortgage loan-to-value is 80%, private mortgage insurance is not included in monthly payments.

Buyers able to put aside a 10% down payment may opt for an 80/10/10 mortgage loan: 80% first mortgage, 10% second mortgage, 10% down payment. Since the piggyback loan features a first and second mortgage, interest paid on both mortgages is tax deductible.

Gain Equity: Because of rising property values, private mortgage insurance can be eliminated once your home reaches a 20% equity threshold. Gaining equity in a home is an appealing feature of homeownership. For the majority of homeowners, homes are their biggest investment. When planning for retirement, some homeowners choose to payoff their entire mortgage balance over the course of thirty years, and then downsize to a smaller residence while pocketing the equity.

In short, equity is the difference between a mortgage balance and the market value of a home. For example, if a homeowner owes the mortgage company $80,000, and their property is appraised at $140,000, the equity would be $60,000. In some housing markets, the prices of homes increase very rapidly. Thus, homeowners may acquire huge equity amounts within a few years.

Make Extra Mortgage Payments: Steady property values mean it will take longer to gain equity in your home, which could equal several years of PMI payments. Sporadically making an extra payment is an easy method for paying down the principal balance and increasing your home's equity.

Consider making a double payment every couple of months, or increase your monthly payments by $100 or $200. To ensure that the extra money is applied to the principal, contact your mortgage lender beforehand, and inquire about the proper way to submit "principal only" payments.