What is private mortgage insurance (PMI) and can my mortgage lender require it?

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Lenders typically require private mortgage insurance (PMI) from homeowners whose mortgages are more than 80% of the value of their home. The original objectives of PMI were to help potential homeowners purchase residences with smaller down payments (less than 20%) while providing a degree of insurance against default to lenders who provided financing for these mortgages. Premiums typically are determined by the size of the down payment, the type of mortgage, and the amount of the insurance coverage. Premiums may be paid by either the borrower or the lender, which results in a higher interest rate on the mortgage.

Cancelling PMI

There are circumstances that trigger the cancellation of PMI. If you are a mortgage holder and are paying premiums, you have the right to request cancellation, in writing, if you meet the following criteria:
  • You have reduced your mortgage to the point where it equals 80% or less of the purchase price or the appraisal value of your home when you purchased it, whichever is less
  • You have a good payment history. You cannot be 30 days late with your mortgage payment within one year of your request, or 60 days late within two years.
  • You must be current on your loan
  • An appraisal can document that the home's value has not declined below the original value
  • There are no subordinate liens, such as a home equity loan
Mortgage lenders or servicers who pay PMI on behalf of the borrower are required to automatically cancel the insurance under the following circumstances:
  • When the principal balance of the mortgage is first scheduled to reach 78% of its original value
  • The loan does not meet the definition of "high risk"
  • A mortgage holder has a good payment history as indicated above
  • A mortgage reaches the midpoint of the amortization period — for a 20-year mortgage with 240 monthly payments, the 120th payment, for example
To determine how the rules for PMI apply to you and your mortgage, contact the organization servicing your mortgage loan.

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