Lenders typically require home buyers to pay mortgage insurance when they put down less than 20 percent of their home's value. Payouts to the lenders are triggered when borrowers miss payments.

Private Mortgage Insurance is an insurance that most lenders require of all borrowers who put less than 20% down. Its purpose is to protect the lender against losses should the borrower default.

However, in recent years, borrowers had been able to avoid making mortgage insurance payments by taking "piggyback" second mortgages that cover the 20 percent down payment.

As defaults have grown, lenders are less willing to provide those second mortgages, which have meant more new business for mortgage insurance companies.

Overall applications for mortgage insurance rose to 173,259 in November, up 65 percent from 93,321 in the same month a year earlier.

Misconception about PMI

The most common misconception is that PMI is a mortgage life insurance policy whereby the mortgage would be paid off should the borrower die. It is not. Instead, it is a protection of the lender in case the borrower defaults. Almost "all" conventional mortgages with less than a 20% down payment will require a PMI coverage.

The cost of PMI will depend on the size of the loan and the insurer. Monthly payments for the insurance will generally fall into the $25 - $100 range for median priced homes.

Lenders have found that those who put down less than 20% are far more likely to default than those who put down more. With the protection of PMI, lenders are able to make more loans with down payments as low as 5% or 10%. This is especially important to first-time buyers, where liquid cash for down payments and closing costs is often tight.

Although at first glance PMI appears to benefit only the lender actually it is really for the buyer’s advantage by giving them the ability to purchase a home with a much smaller down payment. Just regularly check your equity as you can cancel the PMI after building 20 percent equity.

Lenders typically require home buyers to pay mortgage insurance when they put down less than 20 percent of their home's value. Payouts to the lenders are triggered when borrowers miss payments.

When canceling PMI, make sure the loan is up-to-date before making the formal written inquiry to the lender. The lender will consider the borrower’s payment history when deciding whether to drop PMI.

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