National Real Estate Exam (PSI)FinancingMedium
A homeowner has a conventional loan with private mortgage insurance (PMI). Under the Homeowners Protection Act, assuming the borrower is current on payments, the lender must automatically terminate PMI once the loan balance reaches what percentage of the original property value?
- A80%
- B78%
- C90%
- D75%
Show answer & explanationAnswer & explanation
Correct answer: B. 78%
The Homeowners Protection Act requires automatic termination of PMI when the loan balance reaches 78% of the original value (based on the original amortization schedule), provided the borrower is current on payments. Borrowers may also request cancellation earlier, at 80% LTV, if certain conditions are met.
Why the other options are wrong
- A. 80% is the threshold for borrower-requested cancellation, not automatic termination.
- C. 90% is far too high; PMI would still be required at this level.
- D. 75% is below the mandated automatic termination point.
PMI Automatic Termination
Federal law requiring lenders to automatically cancel private mortgage insurance once the loan balance reaches 78% of the home's original value.
- Governed by the Homeowners Protection Act of 1998
- Borrower can request cancellation earlier at 80% LTV
- Applies to conventional loans, not FHA loans
Memory trick: 78 is the magic number that sets PMI free.