Private mortgage insurance (PMI) is generally required when the loan amount exceeds 80% of the purchase price (for an acquisition loan) or the appraised value (for a refinance). The insurance provides protection to the lender to compensate for the added risk of the loan.

The homeowner pays the PMI premiums, so this cost should be part of the affordability calculation. PMI can usually be dropped when the property has appreciated sufficiently that the loan is less than 80% of the value.