Which statement about private mortgage insurance (PMI) is true?

Private mortgage insurance (PMI) is a safeguard for lenders that protects them in case a borrower defaults on their loan, particularly when the down payment is less than 20% of the home’s purchase price. The correct statement highlights that lenders are indeed required to cancel PMI under certain conditions, particularly when the borrower has paid down the loan balance to a point where the loan-to-value (LTV) ratio reaches 80% or less. This typically means that the borrower has built sufficient equity in the home, and continuing PMI is no longer necessary.

The requirement for cancellation is outlined in regulations such as the Homeowners Protection Act, which mandates that lenders must provide borrowers with information on how they can request cancellation of PMI and must automatically terminate PMI when they reach that critical equity level. This protects borrowers from unnecessary ongoing insurance costs once they have demonstrated a lower risk profile to lenders.

Understanding this cancellation process is crucial for homeowners aiming to minimize their housing expenses. Borrowers should be proactive in monitoring their mortgage balance and should communicate with their lender to ensure PMI is removed when appropriate.