Private Mortgage Insurance is used to insure conventionally financed mortgages when buyers make a down payment of less than 20 percent. This insurance protects lenders against loan defaults and helps to make mortgage financing more accessible to home buyers with smaller down payments. PMI is paid for by the homeowner, to encourage lenders to take the risk of loaning money to home buyers who have small down payments. If a homeowner defaults on their loan, this insurance protects the loss of the lender.

A new federal law designed to protect homeowners from paying millions of dollars in unnecessary PMI premiums becomes effective on July 29, 1999, and will require lenders to automatically cancel PMI when homeowners' equity reaches 22 percent. The legislation also will give homeowners the right to request PMI cancellation when their equity reaches 20 percent. Those required equity levels are based on the original value of the house, not any increased value over time. The new law also requires that consumers be notified of their cancellation rights and be given the name and number of someone to contact regarding their PMI. The eight states that had their own PMI laws as of January 2, 1998 will not be pre-empted by the federal law. However, if within two years their laws are not as strong as the federal law, the federal standards will prevail.

If your mortgage has been sold to Freddie Mac or Fannie Mae, you should contact your lender if your equity percent is 20 percent or more of the original purchase price. If you aren't at 20 percent equity of the original price, but believe the value of your house has substantially increased, you should discuss with your lender having another appraisal done. Your lender may allow you to cancel PMI if a new appraisal shows that your loan-to-value ratio is at 75 percent or lower. However, be sure to check with your lender before paying for an appraisal. If your loan is not with Freddie Mac or Fannie Mae, you should contact your lender.