Private Mortgage Insurance
Private mortgage insurance, (or PMI) protects a lender in the event that the borrower cannot repay a loan. Lenders generally require mortgage insurance on loans with low or no down payments. This is because stats show that a borrower with 20% or less invested in a home is more likely to default on a mortgage than a borrower with 20% or more invested.
Private mortgage insurance also enables lenders to grant loans that would otherwise be considered too risky to be purchased by 3rd-party investors such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). The ability to have an adequate mortgage market means that lenders can loan more money.
While PMI can be quite expensive, the good news is that you don't have to pay it forever. You can usually cancel it after you have 20% or greater equity in the home. To find out the procedure for doing this, contact your loan provider. Typically, you'll be required to get an appraisal on your home. This usually costs a few hundred dollars, but could be well worth the money in the long run.
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