Private mortgage insurance or PMI is insurance that lenders usually force home buyers to purchase if they take out a loan for more than 80 percent of the home's value. In other words, if you put down less than 20 percent, you'll probably have to pay PMI. This insurance pays the lender if you default on your loan.

PMI rates vary but if your down payment is 10 percent, you might pay

one-half of 1 percent of the loan amount per year. The cost is added to

your monthly mortgage payment.

If your payments have been on time, you can generally ask your lender to

cancel your PMI when the equity in your home, based on your original

purchase price, reaches 20 percent. When your equity reaches 22 percent,

the lender is required to cancel PMI if the loan was signed on or after July 29, 1999. This rule does not apply to FHA or VA loans and certain sub-prime loans.

You can sometimes put down less than 20 percent and avoid PMI by doing a

"piggyback" loan. For example, you might put down 10 percent of the home's value,

take out a first mortgage for 80 percent and a second mortgage for 10 percent. The interest rate on the second mortgage is higher than on the first, but since it only applies to 10 percent of the value, it's usually cheaper than PMI.

Starting in 2007, you can take an itemized deduction for PMI if your

adjusted gross income is less than $100,000. The deduction phases out if

your income is between $100,000 and $110,000 and cannot be taken if your

income is more than $110,000. The deduction is scheduled to expire after

2007.