If you are buying a home with a conventional loan and your down payment is less than 20% of the purchase price, your lender will almost certainly require you to pay Private Mortgage Insurance, or PMI.
A common misconception among first-time buyers is that PMI protects them if they lose their job or cannot make payments. In reality, PMI exists solely to protect the lender in the event that you default on the loan. Depending on your credit score and the size of your down payment, PMI typically costs between 0.58% and 1.86% of your total loan amount annually. For a $400,000 mortgage, this could easily add over $300 to your monthly housing bill.
Fortunately, PMI is not permanent. Once you have built up 20% equity in your home—either by paying down the principal balance so it reaches 80% of the original purchase price, or through the home appreciating in value—you have the legal right to request that your lender cancel the PMI. To avoid PMI entirely from the start, you must either save for a full 20% down payment or qualify for a VA loan, which offers zero-down-payment options with no PMI requirements for eligible veterans.
To learn the exact federal rules regarding when and how your lender is required to drop this insurance, review the official Fannie Mae guide to Private Mortgage Insurance.