Mortgage insurance, also known as private mortgage insurance (PMI), is written by an independent mortgage insurance company that protects the lender from losses if a mortgage with a low down payment defaults. A low down payment is usually defined as less than 20% of the purchase price or appraised value, whichever is less.

A traditional down payment of 20% of the purchase price demonstrates a lower risk to the lender of a borrower defaulting. It indicates, along with other factors considered in the mortgage application process, that the borrower has steady income to afford the down payment. The down payment also covers foreclosure costs for the lender if the borrower does default.

While you can apply for a mortgage with a down payment of less than 20%, this puts the lender at greater risk. The lender may require you to purchase mortgage insurance to lower their risk and offset any costs they may face if you default on your mortgage.

The cost of mortgage insurance depends on your insurance provider and the amount of your loan. Typically, mortgage insurance will cost .5%-1% of your loan amount annually. You may be able to stop paying mortgage insurance when you have 20% of your home’s value paid off in mortgage payments.