History

• There was a time when lenders did not give mortgage loans if buyers had less than a 20 percent down payment. This meant that people that wanted to buy a home had to save for several years to have enough money for a down payment. To increase home ownership, lenders relaxed the 20 percent down payment requirement, but stipulated that if the down payment was less than 20 percent, the buyer had to pay PMI.
  
  

Purpose of PMI

• Now that homeowners can purchase a home with less than 20 percent down, lenders use PMI to protect themselves if the homeowners should default on their mortgage. Most lenders tend to believe that if potential homeowners have less than 20 percent of the purchase price of their home to use as a down payment, the loan is riskier. To help mitigate that risk, they calculate PMI as a percentage of your loan and add that amount to your mortgage payment.
  
  

Calculating PMI

• Many aspects factor into the calculation of monthly PMI payments. The first is the down payment percentage. If homeowners put 20 percent of the value of the home, no PMI calculations are necessary. Other aspects that factor in are credit history, whether the home is the primary residence and the type of loan product. Based on those factors, lenders usually calculate PMI between .5 percent and 1.25 percent of the loan amount. The lender then spreads that amount over the life of your loan and tacks it on to your monthly house payments.
  
  

Automatically Canceling PMI

• Since many homeowners were confused regarding PMI and many lenders continued charging for the insurance even though the loan qualified for cancellation, the federal government enacted the Homeowner Protection Act of 1998. The act requires lenders to automatically cancel PMI when the mortgage balance reaches 78 percent of the original property value. Automatic PMI cancellation as covered by the Homeowner Protection Act only pertains to only conventional loans originated on or after July 29, 1999 and you have to have made on-time monthly payments for the past year to qualify for automatic cancellation. FHA, VA and HUD loans don't qualify for automatic cancellation.
  
  

Borrower Cancellation

• Many homeowners are not aware that they can cancel their Private Mortgage Insurance, though there are terms and conditions to the cancellation. First, the homeowner has to check with the lender to find out percentage qualifications. Lenders who wrote mortgages before July 29, 1999 do not have to stick to the 78 percent rule for automatic cancellations under the Homeowner Protection Act. Generally, the amount you have to pay down on your mortgage before canceling PMI is on your mortgage paperwork. If you meet the qualifications set out by your lender, you can submit a written request to cancel your PMI.