If you have bought a home in the past, or are considering buying a home, condo or townhouse, then you have probably heard the term Private Mortgage Insurance or PMI.

PMI is an insurance product sold by some private insurance companies. PMI protects a lender in case a homebuyer does not or cannot maintain payments on their home loan or mortgage. In other words, PMI protects lenders from loss if a buyer defaults on their loan.

If you are getting a loan to purchase a home or other real estate, most lenders prefer that you put 20% of the purchase price as a down payment. However, not all homebuyers have that amount of money available for a down payment. It is not uncommon for buyers to only put 15% down, or 10% down, or 5% down, or in some cases, no down payment is applied, and the lender provides 100% financing.

To protect the lender’s interests in situations where the down payment is less the 20%, the lender will usually require a borrower to pay for PMI so that the lender is covered in case the borrower later defaults on the loan. The premium charged by insurance companies for PMI is usually a percentage of the loan amount. The premium is normally rolled into the borrower’s mortgage payment. While PMI increases a borrower’s monthly payment, it does help them get a home loan that they may not otherwise be able to obtain.

As an alternative to PMI, many lenders offer two loans to reach the amount of money needed by a borrower. For example, a borrower may obtain a first mortgage for 80% of the loan amount, and a second mortgage for 20% of the loan amount, which totals 100% financing. Borrowers must meet credit, income and debt requirements to be eligible for these types of loans.

Homebuyers should remember that PMI protects only the lender and not the homebuyer. If a borrower does not maintain payments on a mortgage, the lender will mostly likely initiate foreclosure proceedings.

Be sure to shop various lenders to identify the best loan program for your particular situation.