An insurance contract that protects the lender against loss if a borrower can't repay a loan

If your down payment (or equity) is less than 20%, a lender will require you to buy MI. This is a lender's safety net in case you default on the loan and the lender forecloses on your property. The lender will use the money collected from MI to offset any losses. How much you need to pay each month in insurance depends on the loan amount, the type of loan and the down payment. Typically, it costs between 0.15% to 2.5% of the loan amount. You might also have to pay one or two months worth of payments when you close on your home.

The good news is that you don't have to pay MI forever - you can request, in writing, to drop your policy when you have 20% equity in your home. The lender will then check to see that you have good payment history, and will require an appraisal to confirm your property's value.

And, according to a new federal law, if you got your mortgage on or after July 29, 1999, your lender must automatically cancel MI once you have 22% equity.

See: Down payment, Equity
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