PMI, or Private Mortgage Insurance, is often required by banks when borrowers make a relatively small down payment. After a borrower’s home equity reaches a certain level, cancellation of PMI by the borrower or lender becomes possible. But what could this mean for the borrower and the lender, and when does the insurance become eligible for cancellation?

A mortgage borrower can request that PMI be cancelled after surpassing twenty percent equity, according to the Federal Trade Commission. Lenders are generally required by law to cancel the insurance when twenty-two percent equity has been achieved on loans originated after 07/28/99. However, some situations which indicate continued risk to the lender - such as recent late payments - could delay the cancellation of this insurance. It is typically not possible to cancel PMI on federally insured loans or mortgages with LPMI, and there are a couple other exclusions as well.

So what could it mean for the home owner if he or she is eligible for the cancellation of PMI? The most significant change would be that the borrower will make a lower monthly mortgage payment. Rates for insurance on a $100 thousand dollar mortgage generally range from about $25-65 dollars/month, according to sec.state.ma.us, but differ depending upon other characteristics of the loan in question. It could also mean the end of deducting PMI from federal income taxes, if the borrower is eligible for this deduction and has been using it; this will save some time when paying taxes.

Private Mortgage Ins. does not safeguard the borrower from any type of loss, so he or she is not losing protection by requesting its cancellation. As for what cancellation of PMI could mean for the lending institution, it would be susceptible to greater loss if the borrower becomes unable to keep making payments and the home is foreclosed upon. Regarding the insurance company, it stops receiving monthly premiums from the home owner, but no longer has to protect the mortgage lender from loss on the specific loan for which the insurance has been cancelled.

Basically, the cancellation of PMI will mean that the borrower’s monthly expenses are lower, but it is generally not in the interest of the bank or the insurer. It doesn’t mean much else, except that the borrower has a substantial amount of equity and may no longer be able to use a tax deduction for Private Mortgage Insurance.