Private mortgage insurance (PMI)

An insurance contract that protects the lender against loss if a buyer can’t repay a loan

If your down payment (or equity) is less than 20% of the purchase price, a lender will require you to purchase PMI - this is the lender’s safety net in case you default on a loan. How much you need to pay each month in insurance depends on the loan amount, the type of loan and the down payment.

Typically, it costs between .15% to 2.5 % of the loan amount. You might also have to pay one or two months of PMI payments in advance at closing, which is put into an escrow account. The good news is that you don't have to pay PMI forever - you can request, in writing, to drop your policy when you have 20% equity in your home. The lender will then check to see that you have good payment history, and will require an appraisal to confirm your property's value.

And, according to a new federal law, if you got your mortgage on or after July 29, 1999, your lender must automatically cancel PMI once you have 22% equity.