What is private mortgage insurance?

Private mortgage insurance is a policy purchased by home buyers in order to protect lenders in the event that the buyer defaults on the mortgage loan. Lenders typically require PMI whenever the down payment on the home is less than 20 percent of the purchase price.

The Homeowner's Protection Act of 1998 allows home buyers who have 20 percent equity in a home to request cancellation of a PMI policy. Cancellation of the PMI occurs automatically at 22 percent equity as long as buyers are current on the mortgage payments. An exception to this rule sometimes occurs for loans identified as high risk.