Private mortgage insurance

If your lender perceives you as a potential financial risk, you might be required to purchase private mortgage insurance (PMI) in order to obtain your mortgage. This insurance protects your lender from losing money if you stop making payments.

PMI is like any other type of insurance in that you will be required to pay a monthly premium. This premium varies considerably depending on the cost of the house and your financial situation (past and present).

There are different reasons that you might be perceived as a financial risk. Problems with your credit history, such as late payments on other accounts, give lenders good reason to believe that you might not honor the terms of your mortgage. Unless you can afford to make a relatively high down payment (25 or 30 percent), is it likely that you will probably be required to buy private mortgage insurance.

A spotty credit history is not the only reason that a borrower can be required to purchase PMI. Generally speaking, if your down payment is low (under 20 percent of the price of the house), you will be required to purchase PMI. The good news is that you will only be required to pay for the insurance for a limited time. In most cases, you can quit paying for the insurance after you hold 20 percent equity in the house.

In any case, your lender should tell you exactly how long you will be required to hold PMI when you are in the process of closing. Canceling PMI as soon as possible will save you a considerable amount of money.