Insurance required when down payment is less than 20%, protecting the lender.
Private Mortgage Insurance (PMI) is insurance lenders require when your down payment is less than 20% (equivalently, LTV exceeds 80%). PMI protects the lender if you default and the home sells for less than the loan balance. PMI costs typically range from 0.5% to 1% annually of the loan balance (added to monthly mortgage payments). For example, on a $300,000 home with a 5% down payment ($15,000), the loan is $285,000, and PMI might cost $1,425–$2,850 annually ($119–$238 monthly). PMI can be removed once you reach 20% equity through a combination of payments and home appreciation, or by refinancing. Putting down 20% avoids PMI but requires more upfront capital. Lower-down-payment mortgages (FHA, VA, USDA loans) have mortgage insurance built in. Understanding PMI costs is important when deciding how much to put down.