What cost may arise when a large down payment is not made on a mortgage?

When a large down payment is not made on a mortgage, private mortgage insurance (PMI) is typically required by lenders to protect themselves from the risk of borrower default. PMI acts as a safeguard for the lender if the borrower fails to make mortgage payments, which is more likely when the borrower has a smaller equity stake in the property. Typically, lenders require PMI when the down payment is less than 20% of the home’s purchase price.

This insurance increases the overall cost of home financing, as the borrower is responsible for paying the premium in addition to the mortgage. Thus, PMI comes into play specifically because a lower down payment increases the lender's risk, justifying the need for this additional insurance expense. It’s essential for borrowers to be aware of this cost when deciding how much they can afford for a down payment.