Private Mortgage Insurance, called PMI, is a type of insurance a borrower has to get if their down payment on a home is less than 20% of the home’s cost. PMI allows a borrower to get a lower interest rate mortgage because it helps protect a lender against loan default.

Most borrowers will need to get PMI because 20% of a home’s cost represents a large amount of money usually. To help you understand the size of this, 20% of $100,000 is $20,000. That’s quite a bit.

The charges associated with PMI vary depending on things like the size of your down payment as well as the size of the loan. However, the Mortgage Bankers Association of America reports the average amount is about ½% to 1% of the loan annually. This means if you have a $90,000 loan your annual PMI would be $450. The annual amount is divided into monthly payments and isn’t tax deductible.

PMI does have its benefits though. It protects lenders against a loss in case of a loan default, allowing borrowers with less cash to afford more home. Borrowers can not only buy a more expensive home, they can buy a home more quickly because they don’t have to wait years to save up for a larger down payment. Additionally, once the amount you still owe on your home loan reaches 20% you can discontinue your PMI and just pay your regular mortgage charges.