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After years of carefully saving your money and securing your career for long term financial stability, you are finally ready to take the plunge into home ownership. You have been working closely with a committed real estate agent and finally located the home of your dreams. In the meantime, real estate prices have steadily risen and you no longer have the 20 percent down payment required by most lenders. What can you do about this situation?

One answer is private mortgage insurance, or PMI. Private mortgage insurance is a way for a home buyer to secure a mortgage with a down payment less than the usual 20% required by most non-governmental lenders. PMI mortgage insurance is not like government insured mortgages, or guaranteed mortgage loans that require down payments of only 0% to 10% depending upon the type of loan, such as FHA and VA loans.

Since private lenders, such as banks and savings and loans, want to lend money to credit worthy consumers a problem can arise when property values have risen faster than savings. From a mortgage loan point of view, lending money to home buyers having less than 20% of the purchase price available for making a down payment increases the risk of default on the home buyer's part. PMI mortgage insurance is one solution to this problem by insuring the lender's interests in granting the mortgage.

The cost of private mortgage insurance is paid by the borrower. Typically, a small percentage, say one-half to one percent is added to the loan's interest rate to cover the cost. Naturally, this increases the borrower's monthly mortgage loan payment slightly.

PMI does not cover the full amount of the mortgage, only the difference between the appraised value and the percentage of that value the down payment represents. In other words, if a borrower is able to make a down payment of 10% of selling price, the lender will require the borrower to purchase PMI of the other 10% to make up the difference.

The reason for insuring the lender's risk by requiring PMI mortgage insurance is that borrowers unable to make a 20 % down payment are more likely to default on their mortgage loan. If the borrower default on his payments and the home is subsequently foreclosed, the lender will attempt to recover some portion of the loss by selling the home, usually at a loss, at auction. PMI pays the lender, not the borrower when foreclosure happens.

From a home buyer's perspective the larger the down payment is the lower the mortgage interest rate is

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