Lenders typically require you to pay for mortgage insurance when you don't put down at least 20 percent on your home to protect the lender in the event you default on the loan. If you took out your mortgage before July 29, 1999, federal law doesn't require your lender to cancel PMI at all, but it doesn't hurt to ask if you've paid down a significant amount of the loan. For loans taken out after that date, certain criteria apply with regard to cancellation.
Federal Housing Administration mortgages have slightly different rules for when you can cancel mortgage insurance payments than loans from private lenders. For all FHA mortgages, you must pay mortgage insurance premiums until you reach 22 percent equity in your home, as determined by the original purchase price -- later appreciation of your home won't help you. For 30-year mortgages, you must also pay mortgage insurance premiums for at least 60 months, even if your equity exceeds 22 percent before that time. For 15-year mortgages, there is no minimum amount of time to pay mortgage insurance. When you meet the 22 percent equity mark, your mortgage insurance is automatically dropped.
Automatic Cancellation of PMI
For mortgages taken out after July 29, 1999, private lenders must usually cancel private mortgage insurance when you reach 22 percent and you are current on your payments. In certain circumstances -- for example if you are a so-called high-risk borrower with a spotty history of payments -- lenders can continue to require PMI until you reach 50 percent equity. By default, the equity is figured based on the original price of the home. For example, if your home was worth $200,000 when you took out the mortgage, your PMI would typically be automatically cancelled when your mortgage drops below $156,000.
You can request cancellation of your private mortgage insurance when you reach 20 percent equity in your home. If you request an early cancellation, you must also demonstrate that your home hasn't declined in value, typically with a home appraisal. You must also have a history of on-time payments and not have any other liens on the home. Other liens would include second mortgages, home equity loans or tax liens.
Though lenders are not required to consider increases in your home's value, some will, according to Bankrate.com. For example, if home values have skyrocketed, or if you've done substantial home improvements without taking out additional loans, your home's value might have gone up enough that your equity now exceeds 20 percent. However, talk to your lender before you get an appraisal with regard to its rules, because the lender isn't required to accept the appreciated value and home appraisals aren't cheap.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."