Private Mortgage Insurance (PMI) is a frequently misunderstood aspect of mortgaging. Many think its purpose is to pay off the mortgage in case of the death of the borrower, but it is instead designed to protect lenders from default when there is a down payment of less than 20 percent. Almost any conventional mortgage will require PMI if there is a sub-20 percent down payment.

Many people at first think it is unfair that they are forced to pay premiums to protect the lender. However, you are actually paying for the ability to place down payments that total less than 20 percent of the entire price. Data indicates that those who pay less than 20 percent for the down payment are much more likely to default. With PMI, the risk of lending to those who can't afford to pay high down payments becomes more acceptable.

One newer feature of PMI is that it is now more easily cancelable. Where canceling PMI used to be an involved and complicated project, it is now much more buyer-friendly. PMI can be cancelled after your mortgage balance is less than 80 percent of the lesser of either the purchase price or the appraisal value. Of course, in order to request cancellation the mortgage must be current and an appraisal may be necessary.

Of course, the best bet would be to eliminate PMI completely by paying a 20 percent down payment. This would also serve to lower monthly payments and perhaps allow you to buy a more expensive house.

Also, it is important to note that there are plans where PMI can be avoided by taking a second mortgage immediately after purchasing the house. For example, your first mortgage could be for 80 percent of the purchase price with a second mortgage for 10 percent, leaving 10 percent down. This plan may be a good option, but it also has some downsides. The second mortgage will likely be at a higher rate, may have a variable rate that could increase, or might involve a balloon payment.