Is it possible to eliminate PMI (Personal/Private Mortgage Insurance) on a mortgage before reaching 20% down on principal?
On a 5% mortgage, after 24 months of payments on a 30 yr amortization, you will have paid 3% of the principal, so all else being equal, you have 15% equity. If the value is up, even a bit, the first step is to call the bank. If you are pretty sure it's up enough, ask them to remove PMI in exchange for you paying the appraisal fee. If they hesitate, ask them if you prepay the remaining missing 5%, if they'll pull the fee. 8% of principal is paid by the end of year 5, at which time they have no choice but to remove it. Doing so any sooner is their call.  If they agree to the pre-pay deal, I'd find a way to raise the funds. It will save you over $5000 in a short period. Last, while 5% really is great, especially NPNC, shop around, you may find another no cost deal at the same or lower rate, no harm to look, and they may appraise you at 80% LTV. "Banks are currently a lot less open to 'creative financing' than they were a few years ago, but you may still be able to take advantage of the tactic of splitting the loan into two parts, a smaller 'second mortgage' sometimes called a 'purchase money second' at a slightly higher interest rate for around 15-20% of the value, and the remaining in a conventional mortgage.  Since this tactic has been around for a long time, it's not quite in the category of the shenanegans they were pulling a few years back, so has a lot more potential to still be an option.  I did this in for my first house in '93 and again in '99 when I moved to a larger home after getting married.  It allowed me to get into both houses with less than 20% down and not pay PMI. This way neither loan is above 80% so you don't have to pay PMI.  The interest on the second loan will be higher, but usually only a few percent, and is thus usually a fraction of what you were paying for the PMI. (and it's deductible from your taxes) If you've been making your payments on time and have a good credit rating, then you might be able to find someone who would offer you such a deal.  You might even be able to get a rate for your primary that is down in the low 4's depending on where rates are today and what your credit rating is like.   If you can get the main loan low enough, even if the other is like say 7%, your blended rate may still be right around 5% If you can find a deal like this, it's also great material to use to negotiate with your current lender ""either help me get the PMI off this loan or I'm going to refinance.""  Then you can compare what they will offer you with what you can get in a refinance and decide what makes the most sense for you.  On word of warning, when refinancing, do NOT get sucked into an adjustable rate mortgage.  If you are finding life 'tight' right now with house payments and all, the an ARM could be highly seductive since they often offer a very low initial rate.. however then invariably adjust upwards, and you could suddenly find yourself with a monster payment far larger than what you have now.  With low rates where they are, getting a conventional fixed rate loan (or loans in the case of the tactic being discussed here) is the way to go."
There are a few ways to look at this question. Assumptions. Per the original post's assumptions, this answer: In other words, if the owner paid the mortgage on its original schedule, the deal could boil down to a $ 40,000 up-front payment, in exchange for $ 200,000 of equity after 30 years.  Or the deal could boil down to a $ 40,000 up-front payment, in exchange for a $ 810.70 monthly payment starting in 30 years. While the owner is paying down the mortgage, the return on equity is the principal payment divided by the equity.  The principal payment is the net rent minus non-financing costs and interest, so it is actually a profit. The initial return on equity is 6.321 % APR, or 6.507 % APY.  This is calculated by dividing the $ 210.70 monthly principal payment by the initial $ 40,000 equity, and converting from monthly return to annual return. After 30 years, the return on equity is 4.864 % APR, or 4.974 % APY.  This is calculated by dividing the $ 810.70 monthly cash flow (which is no longer reduced by mortgage payments) by the $ 200,000 equity after 30 years, and converting from monthly return to annual return. The cap rate is the same as the return on equity in the absence of debt.  In this example, 4.864 % APR, or 4.974 % APY. The return on equity declines from 6.507 % APY initially to 4.974 % APY after 30 years. This is because the cap rate exceeds the note rate (4.974 % APY vs. 4.594 % APY), and the leverage decreases from 5x to 1x. The weighted average compound annual growth rate of the equity during the 30 years is 5.511 % APY.  Per the original poster's answer, this is computed by taking the 30th root of the 5-fold increase in equity.  Because the owner made no extra principal payments (besides those already discussed), the relevant amounts are the initial $ 40,000 owner payment and the final $ 200,000 owner equity.  5.511 % APY corresponds to a 5.377 % APR. The internal rate of return if the owner never sells can be computed by treating the deal as a $ 40,000 up-front payment, in exchange for an $ 810.70 monthly payment starting in 30 years.  The internal rate of return (IRR) is not a very useful number, because it assumes that you can somehow reinvest the eventual dividends at the same rate.  In this example, the IRR is 5.172 % APR, or 5.296  % APY.  In this example, the IRR is calculated by (iteratively) finding an interest rate for which (initial investment) * (1 + IRR) ^ (number periods before dividends start) = (periodic dividend) / (IRR - growth rate of dividend).  For example: $ 40,000 * (1.004309687)^360 = $ 810.70 / (0.004309687 - 0) = $ 188,111 I then converted the 0.431 % monthly IRR to an annual IRR. The deal can be thought of as a return on equity, plus a return on paying down the mortgage. When computing the return from paying down the mortgage, the initial equity is irrelevant.  It does not matter whether you start with a $ 160,000 mortgage on a $ 160,000 property, a $ 160,000 mortgage on a $ 200,000 property, or a $ 160,000 mortgage on a $ 1,000,000 property.  All that matters is the note rate on the mortgage, which is the applicable compound interest rate. The return on paying down the mortgage equals the note rate of the mortgage.  For a 4.5% note rate, this works out to a 4.594% annual percentage yield (APY). You can confirm this by looking at your amortization schedule.  Suppose you have a $ 160,000 mortgage with a fixed 4.5% APR note rate for 360 months.  Your monthly payment is $ 810.70.  In the first month, $ 600 goes toward interest, and $ 210.70 reduces the principal.  In other words, the $ 210.70 principal payment eliminated the need for a $ 810.70 payment 30 years later.  Notice that: . $ 210.70 * (1 + 0.045 / 12)^360 = $ 210.70 * (1.00375)^360 = $ 210.70 * 3.8477 = $ 810.71 which is within rounding error of $ 810.70. The interest rate is 3/8 % per month, which is an APR of 4.5%, and an APY of 4.594 %. One way to reduce the monthly payment due each month is to do everything to eliminate one of the loans. Make the minimum payment to the others, but put everything into eliminating one of the loans. Of course this assumes that you have separate loans for each year of school.  Make sure that in trying to get aggressive on the loan repayment that you don't neglect the saving for a down payment. Each dollar you can put down will save you money on the mortgage. It might also allow you to reduce the mortgage insurance payments. If you pay one student loan back aggressively but can't eliminate it you might be worse off because you spent your savings but it didn't help you qualify for the mortgage. One way to maximize the impact is to not make the extra payments until you are ready to apply for the mortgage. Ask the lender if you qualify with all the student loans, or if you need to eliminate one. If you don't need to eliminate a loan, then apply the extra funds to a larger down payment or pay points to reduce the interest rate. My opinion is that 50% savings is the number to shoot for, and I strive toward that number as often as possible.  10% - savings for retirement 10% - savings for short term emergency fund 25% - payment on mortgage principal 5% - savings for planned big purchases I overpay the principal so that 25% of my income goes to principal payments, and I separately account for the mortgage interest/home owners insurance as another expense in my budget.  Because of this aggressive payment schedule, the house I bought 2 years ago will be payed in full in another 9 years.  I own another property outright that I paid down in the same fashion and I collect rent on it as a supplement to my income.  I started with a small townhouse that I could easily afford, but now I have a much larger home that I can still easily afford. The emergency fund doesn't need to be more than 6 months of expenses, which is 3 months of income if your expenses are only 50% of your income.  I keep 6 months of expenses liquid and another 12 in a low risk investment.  Once you have your emergency fund funded, you can add that percentage to a different category (say 15% to retirement and 10% to planned big purchases), or you can over-fund it.  I have had a few catastrophes that have depleted that fund, so I like having the extra 12 months of income available. I set the last 5% aside for wants that are not regular expenses.  If I want a car, I save 5% of my income until I can pay cash for it.  I have an infinite number of these wants, so I prioritize them and buy them in order when the cash becomes available. The reason I use percentages is to keep me focused when my income increases. Instead of spending all the additional money that I could afford to spend each time I get a raise. I instead only increase my expenses to the 50% mark.  It was much harder to save 50% when I got my first job out of college, but now I live quite comfortably on that percentage and I could take a large hit to my income before I would need to make significant changes to my lifestyle. "I'm going to answer your questions out of order. Emergency fund: Depending on how conservative you are and how much insurance you have, you may want anywhere from 3-12 months of your expenses on hand. I like to keep 6 months worth liquid in a ""high-yield"" savings account. For your current expenses that would be $24k, but when this transaction completes, you will have a mortgage payment (which usually includes home-owners insurance and property taxes in addition to your other expenses) so a conservative guess might be an additional $3k/month, or a total of $42k for six months of expenses. So $40-$100k for an emergency fund depending on how conservative you are personally. Down payment: You should pay no less than 20% down ($150k) on a loan that size, particularly since you can afford it. My own philosophy is to pay as much as I can and pay the loan off as soon as possible, but there are valid reasons not to do that. If you can get a higher rate of return from that money invested elsewhere you may wish to keep a mortgage longer and invest the other money elsewhere. Mortgage term: A 15-year loan will generally get you the best interest rate available. If you paid $400k down, financing $350k at a 3.5% rate, your payment would be about $2500 on a 15-year loan. That doesn't include property taxes and home-owners insurance, but without knowing precisely where you live, I have no idea whether those would keep you inside the $3000 of additional monthly home expenses I mentioned above when discussing the emergency fund. That's how I would divide it up. I'd also pay more than the $2500 toward the mortgage if I could afford to, though I've always made that decision on a monthly basis when drawing up the budget for the next month." It depends on the loan contract if this is even possible, and also if it is the default.  Banks of course prefer to use those extra payments against ‘future payments’, meaning you are giving them interest-free money upfront, to apply against your next requirement payment. That is of course very bad for you, as you do not only save no interst, but also lose the cash-flow. Most (but not all) contracts do allow prepayments, but many require you to explicitly specify that you want the extra applied against the principal. "9% would be an absurdly high rate in the US by today's standards, so you should at the very least consider refinancing to fix that. Paying off completely is of course another way to fix that.  Which approach makes more sense depends on what you plan to do with the money instead if you do refinance -- if you can put it in an investment which yieds a higher percentage than the loan costs you, than refinancing the mortgage could actually be a profitable decision. You also need to consider what the bank will want to see in order to give you a mortgage on the new property. I have no idea whether they'd be happier that you had no prior mortgage, that you had the mortgage but also had the cash to pay it off, or if they wouldn't care. Remember that you want to be able to make at least a 20% down payment on the new property to avoid the insurance fees. That requires that you have a reasonable amount of cash-equivalent on hand. And generally, ""house rich but cash poor"" is an awkward state to be in." You may find it difficult to remove the PMI under any circumstances, banks will give you the run-around for quite a while hoping you get bored and continue to pay it. We got rid of ours by refinancing with a different bank, but at the time it was possible to get the new bank to pay all the fees if you worked through the right people, now it may be worth it to just keep fencing with the bank in the hopes that you run into someone with a little decency. Whenever you put less than 20% down, you are usually required to pay private mortgage insurance (PMI) to protect the lender in case you default on your loan.  You pay this until you reach 20% equity in your home.  Check out an amortization calculator to see how long that would take you.  Most schedules have you paying more interest at the start of your loan and less principal.  PMI gets you nothing - no interest or principal paid - it's throwing money away in a very real sense (more in this answer).  Still, if you want to do it, make sure to add PMI to the cost per month. It is also possible to get two mortgages, one for your 20% down payment and one for the 80%, and avoid PMI.  Lenders are fairly cautious about doing that right now given the housing crash, but you may be able to find one who will let you do the two mortgages.  This will raise your monthly payment in its own way, of course. Also remember to factor in the costs of home ownership into your calculations.  Check the county or city website to figure out the property tax on that home, divide by twelve, and add that number to your payment.  Estimate your homeowners insurance (of course you get to drop renters insurance, so make sure to calculate that on the renting side of the costs) and divide the yearly cost by 12 and add that in.  Most importantly, add 1-2% of the value of the house yearly for maintenance and repair costs to your budget.  All those costs are going to eat away at your 3-400 a little bit.  So you've got to save about $70 a month towards repairs, etc. for the case of every 10-50 years when you need a new roof and so on. Many experts suggest having the maintenance money in savings on top of your emergency fund from day one of ownership in case your water heater suddenly dies or your roof starts leaking.  Make sure you've also estimated closing costs on this house, or that the seller will pay your costs.  Otherwise you loose part of that from your down payment or other savings. Once you add up all those numbers you can figure out if buying is a good proposition.  With the plan to stay put for five years, it sounds like it truly might be.  I'm not arguing against it, just laying out all the factors for you. The NYT Rent Versus Buy calculator lays out most of these items in terms of renting or buying, and might help you make that decision. EDIT: As Tim noted in the comments below, real monthly cost should take into account deductions from mortgage interest and property tax paid.  This calculator can help you figure that out.  This question will be one to watch for answers on how to calculate cost and return on home buying, with the answer by mbhunter being an important qualification