PMI is an insurance policy that protects lenders when borrowers default on their loan. The lender receives payment for a portion of its losses from the PMI provider. This protection gives lenders an incentive to finance otherwise risky buyers.
PMI Tipping Point
PMI comes into play in a purchase or refinance loan if you have less than 20 percent equity. If the difference between your loan amount and the home's appraised value equals less than 20 percent, you have a high loan-to-value mortgage.
Lowering Your LTV
Your lender can remove PMI when your LTV reaches 80 percent or less. You have to pay the mortgage down sufficiently or your property's value must increase enough to reduce your LTV.
Lenders must automatically cancel PMI when you pay your loan down to 78 percent. Otherwise, you must ask your lender to consider cancelling it, an appraisal must be done at your expense, and your mortgage must have a good payment history.