Mortgage insurance is a form of insurance designed to protect mortgage lenders in the event of a default on a real estate loan. Mortgage insurance policies can also protect real estate investors if they support a loan that ends in default.

What Is PMI Insurance?

Often, mortgage lenders will require a borrower to purchase a mortgage insurance policy (also called private mortgage, or PMI insurance) if the loan will cover 80 percent or more of the purchase price of the home. In other words, if you buy a home and intend to make a down payment of less than 20 percent, your lender may require you to buy a PMI insurance policy before you can close on the home.

Insurance premiums for PMI policies usually amount to about 1 percent of the loan annually, divided into monthly payments. You can use an online mortgage calculator to determine the additional cost of mortgage insurance.

For example, a mortgage calculator can show how a $100,000 home purchase, bought with a 10 percent down payment, will result in a loan of $90,000. In this scenario, a 1 percent mortgage insurance policy will amount to a $900 annual payment. This will result in a $75 monthly fee added to the mortgage interest, home insurance and property tax payments held in escrow that together comprise your monthly mortgage statements.

Using Mortgage Insurance to Your Advantage

Mortgage insurance can be very helpful for borrowers, since the purchase of a PMI insurance policy will often allow you to borrow more money. But remember that this means you're paying more money over the long term to live in your home.

Insurance protects the lender at your expense. If you decide to take out a home loan from a mortgage lender who requires mortgage insurance on a down payment less than 20 percent of the home value, keep track of your principal as you make monthly payments. Once you've crossed the 20 percent threshold, notify your lender so you can stop paying premiums on your mortgage insurance policy as soon as possible.