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Private Mortgage Insurance (PMI)

Mortgage insurance is a type of guarantee to protect lenders against losses due to foreclosure. Private mortgage insurance companies provide the protection. Private Mortgage Insurance (PMI) allows lenders to accept a lower down payment than usual and is often required when you buy a house with less than 20% down. The insurance provides the assurance of repayment that a higher down payment would provide to cover a lender's losses in the event of foreclosure. Without mortgage insurance coverage, you might not be able to buy a home without at least a 20% down payment. The cost of PMI increases as your down payment decreases.

For loans originated before July 29, 1999 - the decision on when you may cancel your private insurance coverage does not always depend solely on the degree of your equity in the home. Sometimes, the final say on terminating a PMI policy is reserved jointly for the lender and any investor who may have purchased an interest in the mortgage. However, PMI can and should be terminated if certain terms are met.

If you signed your mortgage before July 29, 1999, you can ask to have the PMI canceled once you exceed 20 percent equity in your home. However, federal law does not require your lender or mortgage servicer to cancel the insurance.

For loans originated on or after July 29, 1999 - your PMI must (with certain exceptions) be terminated automatically when you reach 22 percent equity in your home based on the original property value or the purchase price, whichever is less, if your mortgage payments are current.

You can also request cancellation (with certain exceptions) when you reach 20 percent equity in your home based on either the purchase price or the original property value, whichever is less, if your mortgage payments are current.

If you want to request cancellation of PMI on your loan, contact your lender. In most cases, an appraisal will be required to determine the value of the property, and you will probably be required to pay the cost of this appraisal.

For FHA loans - in October 2000, FHA initiated its Homebuyer Savings Plan. Previously, PMI cancellation was not available. This program reduces upfront premiums by one-third, eliminates annual premiums after a homeowner has reached 22 percent equity in the home, and pays premium refunds to current FHA borrowers. For additional information about this plan, or to find out if you qualify, contact your lender.

Private Mortgage Insurance (Federal Reserve Bank of San Francisco)