"Private mortgage insurance" (PMI) protects the lender in the event that you default on your mortgage payments and your house isn't worth enough to entirely repay the lender through a foreclosure sale. You pay the premiums, and lenders almost always require PMI for conventional loans where the down payment is less than 20%.
The lender adds the cost of PMI to your mortgage payment each month, in an amount based on how much you've borrowed. The good news is that PMI can usually be canceled after your home's value has risen enough to give you 20% to 25% equity in your house.
The federal Homeowners' Protection Act, which applies to people who bought their homes after July 29, 1999, established some baseline rules about canceling PMI.
The Act says you can ask that your PMI be canceled when you've paid down your mortgage to 80% of the loan. You must have a good record of payment and compliance with the terms of your mortgage, you make a written request, and you have to show that the property's value hasn't gone down. You also have to show that you haven't encumbered the property with liens, such as a second mortgage. If you meet all these conditions, the lender must grant your request to cancel the PMI.
What's more, when you've paid down your mortgage to 78% of the original loan, the law says that the lender must automatically cancel your PMI. But don't count on the lender to notice—keep track of the date yourself. Unfortunately, it might take years to get to this point. Because of amortization, your schedule of payments is front-loaded so that you're mostly paying off the interest at first.
Even if you haven't paid down your mortgage to one of these legal limits, you can start trying to get your PMI canceled as soon as you suspect that your equity in your home or your home's value has gone up significantly, perhaps because your home's value has risen along with other local homes or because you've remodeled.
Such value-based rises in equity are harder to prove to your lender. Some lenders require you to wait a minimum time (around two years) before they will approve the cancellation of PMI on this basis and your mortgage balance might need to be paid down to 75%.
The exact procedures for getting your lender to cancel your PMI are largely in the hands of your lender—or, to be more accurate, in the hands of the company from whom your lender buys the insurance (though you'll never deal with that company directly). You'll most likely need to:
Most lenders recognize that there's little point in requiring PMI after it's clear that you're making your mortgage payments on time and that you have enough equity in your property to cover the loan if the lender has to foreclose. Nevertheless, many homebuyers find their lenders to be frustratingly slow to cancel the coverage. The fact that they'll have to spend time reviewing your file for no immediate gain and that the insurance company might also drag its feet are probably contributing factors.
If your lender refuses, or is slow to act on your PMI cancellation request, politely but firmly request action. Contact the lender by letter or email. Copies of such communication are important to prod the lender into motion and serve as evidence if you're later forced to take the lender to court.
You can also submit a complaint online to the Consumer Finance Protection Bureau (CFPB). This U.S. government agency promises to forward your complaint to the company and work to get a response.
If nothing else works, and court action becomes your best option, small claims court can be a good avenue, and you won't need a lawyer to accompany you. For more information, including how to write polite but forceful demand letters, see Everybody's Guide to Small Claims Court, by Cara O'Neill (Nolo). Or, for online information on going to small claims court, also see Nolo's Small Claims Court FAQ.
To learn more about PMI and other aspects of buying a home, see Nolo's Essential Guide to Buying Your First Home, by Ilona Bray, Ann O'Connell, and Marcia Stewart (Nolo).