Down Payment

• Lenders usually require borrowers to make a minimum 20 percent down payment on a home in order to receive a mortgage, which ensures that the borrower has sufficient equity in the property to justify the lender's risk of underwriting the loan. Since most individuals cannot afford to pay a large lump sum, they can use PMI to pay as little as 3 to 5 percent down on a mortgage, according to the Federal Reserve Bank of San Francisco.
  
  

Appreciation

• Without PMI, borrowers must save up for years to obtain a down payment while potentially paying out tens of thousands of dollars a year in rental costs. In addition, home prices can appreciate faster than an individual can save up a sufficient down payment. According to the Federal Reserve Bank of San Francisco, if a borrower uses PMI to purchase a property, the appreciation in the value of her home may allow her to reach 20 percent equity faster than if she saved up the money for a larger down payment.
  
  

Risk

• Home foreclosure can cost a lender tens of thousands of dollars between real estate agent fees, property damage and attorney costs. If a borrower defaults on his home loan and has PMI, the lender will submit a claim with a PMI agency to receive compensation from the insurer if the lender's losses from foreclosure are greater than the mortgage balance. Since the borrower pays for all PMI costs, lenders take less risk underwriting a home loan, allowing them to loosen their lending standards.
  
  

Taxes

• According to Internal Revenue Service Publication 963, U.S. residents can write off all PMI premiums paid to the Department of Veterans Affairs, the Rural Housing Service, Federal Housing Administration or a private insurer on their annual tax returns as of the 2010 tax year. Every year, lenders will mail Form 1098 to borrowers who spend more than $600 on mortgage interest and PMI premiums annually. Taxpayers can deduct paid mortgage insurance premiums listed on Form 1098 on line 13 of Form 1040, Schedule A.