Private Mortgage Insurance (PMI) insures the lender against borrower default on the mortgage. It insures the lender, not you, but you pay the premiums. PMI is usually required of borrowers who put down less than 20% of the purchase price.

When your equity in the home exceeds 20% of the purchase price, you can ask your lender to remove the PMI. Sometimes it will be difficult to get a lender to do this, especially in the current economy when home values have been declining. The Homeowners Protection Act of 1998 requires the lender to notify you about PMI and your options for requesting cancellation of this insurance. You have the right to cancel the PMI when you have paid down the debt to 80% of the original purchase price (or appraised value), provided that you have not been more than 30 days delinquent in the past year and 60 days delinquent in the past two years. A home equity loan or line of credit counts against you, since it reduces your equity in the home. The lender may require a fresh appraisal if it believes that the value of the home has decreased.

A good rule of thumb is the equity in a home will reach 80% of the original amount of the loan (i.e., assuming you borrowed 100% of the value of the home) after I x (1.4 x T^2 - 1.6 x T - 3.6) + 2.3 x T payments, where T is the term of the loan in years and I is the interest rate. For example, on a 30 year loan at 6% interest it will take 140 payments (11 years, 8 months) before the principal reaches 80% of the initial balance. On a 15 year loan at 6% interest it will take 52 payments (4 years, 4 months) before the principal drops to 80% of the initial balance. On the most common loans the 80% point is reached 25% to 50% of the way into the loan, with a third being typical.

If you are current on the loan, the lender must automatically cancel the PMI when you have paid down the debt to 78% of the home's value (77% for high risk loans). If you are delinquent, the cancellation will occur as soon as you are current or you reach the midpoint of the loan term.

Still, you sometimes have to jump through hoops to get the PMI canceled, and PMI does add to your costs. This is one reason why it is often better to buy a house with 20% down, since it avoids the added cost of the PMI.