Lending is a risk in the financial industry, and mortgage insurance provides financial security to the lending agency. Mortgage insurance, or PMI, is used to protect the lender in case of a default by the borrower. Lenders have found that borrowers are more likely to default when they pay less than 20 percent on their down payment, so that is why mortgage insurance is required for those loans. The lender is considered the beneficiary so that if the borrower stops paying on the mortgage they will still be paid in full.

The monthly cost of mortgage insurance can get up to $100. The cost will depend on a variety of factors including the amount of the loan and the insurance carrier.

There are some programs that exist that can help the borrower to avoid PMI. The 80-10-10 mortgage will allow the borrower to avoid mortgage insurance completely by immediately getting a second mortgage after purchasing the home. In this situation, the buyer would get a first mortgage for 80 percent of the purchase price without mortgage insurance, a second mortgage for 10 percent of the purchase price, and they would put down ten percent. Using the example of a $150,000 home, the difference in monthly payments between the 80-10-10 plan and a standard fixed mortgage would be about $35.00.

FHA Loans

Mortgage insurance for FHA loans is different from conventional loans. FHA loans are insured by the federal government, and borrowers are required to pay the monthly mortgage insurance for the first five years of the loan. Once the borrowers have paid off 20 percent of the original purchase price they can refinance and have the insurance removed.

Borrowers with a conventional loan also need to wait until they have paid off 20 percent of the original purchase price of their home, but they can request the insurance be removed after only a year of having the loan. A written request should be made to the lender in order to so, but many lenders are required to automatically remove it once the balance gets to 78 percent.