What happens to private mortgage insurance if it is cancelled?

The correct answer pertains to the condition that triggers the cancellation of private mortgage insurance (PMI). PMI can be canceled when the homeowner’s equity in the property reaches 20% based on the original purchase price or a reappraisal that indicates that equity. However, under the Homeowners Protection Act, once the equity reaches 22%, the lender is required to automatically cancel the PMI. The confusion may arise from the wording of the options regarding home equity reaching specific percentages.

While homeowners can actively request cancellation of PMI once they reach 20% equity, the 78% figure noted in the correct choice is related to the automatic cancellation provision that must occur once the loan balance is paid down to that level, which reflects the required equity needed by the lender to eliminate ongoing PMI costs.

This ensures that homeowners are not burdened by PMI longer than necessary once their equity position improves. Having an understanding of these thresholds helps homeowners recognize when they can reduce their monthly mortgage costs.