What PMI Is and When It Comes Off

Private mortgage insurance covers the lender against loss if the loan defaults and the sale of the property does not clear the balance. It pays the lender, not the borrower, and it does nothing for the borrower's own position if things go wrong.

It is charged because a small down payment leaves little cushion between the balance and the property value. Its purpose is to let a lender advance more than it otherwise would against the same property, which is also why it disappears once the cushion exists.

The annual charge is a percentage of the loan balance, and the rate depends on the loan-to-value ratio and the credit profile. It is usually collected as one twelfth of the annual amount inside the monthly payment, alongside taxes and homeowner's insurance.

Because it is calculated on the balance rather than on the original loan, it drifts down slightly as the loan amortizes. The reduction is small relative to the size of the charge, and the meaningful change is cancellation rather than decay.

The first is automatic. Under the federal rules that apply to most conforming loans, the lender must terminate PMI when the balance is scheduled to reach seventy-eight per cent of the original value, provided payments are current.

The second is on request. A borrower can ask for cancellation once the balance reaches eighty per cent of the original value. This one does not happen by itself - a lender is not obliged to volunteer it, and a borrower who never asks will wait for the automatic date instead.

The gap between the two thresholds is a real amount of money. On a long loan, the difference between eighty and seventy-eight per cent can be well over a year of payments.

Both statutory thresholds are measured against the original value of the property, which is fixed at closing. A house that has appreciated sharply does not reach either threshold any sooner.

Servicers may allow cancellation based on a current appraisal under their own policies, but that is a lender programme rather than a right, and it generally involves paying for an appraisal and meeting seasoning requirements.

Extra principal payments do accelerate the statutory dates, because they move the balance rather than the value. That is the mechanism a borrower actually controls.

The rules described above apply to conventional loans. Government-backed programmes carry their own mortgage insurance with their own structures - some charge an upfront premium as well as an annual one, and on some the annual premium runs for the life of the loan regardless of the balance.

Where that is the case, refinancing into a conventional loan is the mechanism that removes it, which turns the question into a refinance calculation rather than a cancellation request.