If you are planning on making a down payment that's less than 20% down on your home's value, you will most likely be required to purchase private mortgage insurance. Even though this is typically a requirement when purchasing a home with less than 20% down, it is important to know what private mortgage insurance is and how it will affect you.

Understand what PMI is before you buy.

What is Private Mortgage Insurance?

Private mortgage insurance, or PMI, is designed to protect the lender in case a borrower does not make their mortgage payments. PMI is a requirement put into place by the lender when borrowers have a down payment that is less than 20% of a home's purchase price. It may seem as though you are paying to protect the lender, and while that is true, private mortgage insurance also allows you to make a lower down payment and still purchase a property.

How Much Will it Cost?

The cost of private mortgage insurance depends on a variety of factors. The rate can vary between .3% and 1.5% per year of the original loan amount. The exact amount is determined by looking at your credit score, the loan amount, and your down payment. The larger the down payment is, the less you will pay for PMI. The same can be said for better credit scores and lower mortgage amounts. This insurance amount is typically billed monthly with your mortgage.

When Can it be Canceled or Removed?

One of the most common questions about private mortgage insurance is when this insurance can be removed or canceled. Your lender is required to cancel your PMI once you have paid down your loan amount below 78% of the original home value. Depending on your mortgage terms, this may take a few years to accomplish. However, it is important to keep in mind that your additional PMI payment every month will go away eventually.

Calculating your PMI premium can help you determine your total monthly costs.

Who Cancels PMI Insurance?

You are not required to cancel this insurance but you should keep an eye on it to ensure your lender cancels it on your behalf. Since every lender is different, you may be able to request a PMI cancellation through your lender once you've paid your loan down to 80% of the home's value. This is not a guarantee, but it is worth a try since it is so close to the required cancellation threshold. Since PMI can be expensive and add up fast, another way to eliminate it is by refinancing your loan through another lender. This isn't necessarily the best approach, and only advisable if you're in a financial position to refinance and the loan terms are favorable.

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