How Private Mortgage Insurance Affects a Mortgage

If you are making a down payment of less than 20 percent, you will most likely have to get Private Mortgage Insurance (or PMI). It ensures that the lender is guaranteed, by the mortgage insurer, 80 percent of the loan if you default. The insurance premium amount varies by the loan-to-value of the house and type of loan. But generally, the initial premium is 1-5% of the mortgage total, and possibly an additional monthly fee.

Not all lenders will require PMI, but those that follow the Fannie Mae and Freddie Mac guidelines will.

Some borrowers opt to get a second mortgage to use for part of the down payment to avoid paying PMI. For example, you can get an 80/10/10 loan (80 percent loan, 10 percent second mortgage, and 10 percent down) or a variation thereof and sidestep PMI.

Government loan programs, such as FHA or VA loans, are backed by the government rather than PMI.