If you want to buy your own home but haven't saved enough to make a regular down payment, then don't assume that you can't apply for a home loan just yet. Some lenders give loans with lower down payment terms if you take out private mortgage insurance (PMI) as part of your contract.

Read on to learn more about this kind of insurance and how it works.

PMI Minimizes Lender Risk

A PMI policy works like any other type of insurance. It pays out money in specific circumstances. Here, your policy insures certain events when you can't make home loan payments and default on your mortgage.

While you pay for this policy, it doesn't protect you; it protects your lender. If you get a low down payment loan, then your lender has to give you more money to buy a property. If you were to default, then they lose more money.

PMI would pay them back some of this money. This mitigates the risk of default and makes lower down payments more viable for lenders.

PMI Has Variable Costs

Lenders might ask every applicant for a low down payment home loan to take out a PMI policy. However, the costs of this policy are variable.

For example, the down payment you pay affects your policy costs. The lower your down payment, the more you pay for MPI. Your type of mortgage, loan amount, and credit score also affect these costs.

PMI Increases Mortgage Costs

While a PMI policy helps you get a mortgage when you can't afford a regular down payment, you have a trade-off here. You have to factor your insurance costs into your mortgage repayment budget.

Typically, lenders add your insurance costs to your monthly payments. Some will allow you to pay a single upfront cost when you close. In either case, you should check how the costs of buying this insurance affect your budget.

PMI Doesn't Last Forever

One of the big benefits of using PMI to get a low down payment home loan is the fact that you won't need a policy forever. You should be able to stop paying for this insurance once you pay some of your loan.

For example, your lender might only require you to have this insurance until you have reached a set equity amount in your home. Once you own the same percentage of your property as you would if you had paid a traditional down payment, then your lender might cancel your PMI coverage or allow you to do this.

To find out more about PMI and other ways to get a low down payment home loan, talk to lenders or mortgage brokers.