PMI is Private Mortgage Insurance, and you will generally have to buy it if you purchase a house with less than 20% down. It ensures that the lenders will get their money back if they have to foreclose on your loan. PMI is provided by mortgage-insurance companies separate from the bank, and enables banks to accept lower down payments than they normally would consider.

Your PMI costs are inversely proportional to the size of your down payment. If your down payment is close to 20%, your PMI cost will be low; if your down payment is the minimal 3% required on some FHA loans, your PMI will be considerably higher. The premium of your PMI is added to your monthly mortgage payment; this enables the bank to easily monitor it to assure themselves that it is being paid.

You may not cancel your PMI at will, or even when you've built up 20% equity in your home. The lender and anyone else with an interest in the mortgage have the final say on PMI cancellation. In general, most lenders will allow your PMI to be canceled when you have paid your loan down to the point that you owe only 80% of the original property value of the house. Others will require that you pay PMI for a year or two before you may apply to remove it.

If you think you're eligible to cancel your PMI, call your lender. He will generally require an appraisal, which you will have to pay for. If you're refinancing, this is another way to cancel your PMI; with an eligible loan, you simply opt to not add PMI to it.