Private Mortgage Insurance, PMI
Loans with an LTV over 80% may require Private Mortgage Insurance (in some cases 75% or 70% when refinancing).
If you do not have a 20 percent down payment, lenders will allow a smaller down payment. With the smaller down payment loans, however, borrowers are usually required to carry private mortgage insurance.
By insuring the loan the private company helping to protect the mortgage lender against mortgage default and agrees to repay the lender for all money lost by the lender in case the property is foreclosed on. Because the PMI is charged, the lender can allow a borrowers to reduce downpayment from 20% to 5% of the property purchase price. FHA loans require MIP instead of PMI.
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