Private mortgage insurance
What is it? Private mortgage insurance, or PMI, protects a lender against suffering a loss in the event a buyer defaults on a loan. PMI covers any shortfall between the price the home fetches when resold by the lender and the amount the homeowner owes.
Lenders typically require PMI for loans with an outstanding balance that is 80 percent or more of the home's current market value. Keep in mind that although borrowers pay PMI, the insurance does nothing to protect them; it's strictly for the lender's protection.
Once homeowners reach 20 percent equity, they have the right (under the Homeowner's Protection Act of 1998) to request cancellation of PMI.
Learn more about mortgage insurance.