Private mortgage insurance (PMI) is often a necessary expense that companies buying a house with less than 20 percent down in cash.  PMI allows you to purchase a home with a small down payment and helps the lender resell your mortgage the secondary market to an institutional investor.

PMI is additional insurance designed to protect the lender from individuals who default on their loan and who have less than 20 percent equity in their property.  Mortgage experts say that home buyers who make small down payments ar more likely to default on their home loans that those who put down the traditional 20 percent of the purchase price.  Lenders require those buyers to purchase PMI to insure the lender against the extra risk of foreclosure.

Most states have regulations prohibiting lenders from making a loan in excess of 80 percent of the purchase price without PMI.  The difference between putting down 20 percent and 15 percent or even 1 percent, wouldn’t see to make a substantial difference on the surface but the MBA says that 20 percent provides a necessary cushion for both home buyers and lenders.

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