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In what situation would private mortgage insurance be canceled?
When the borrower requests cancellation form
When refinancing is completed
When the borrower achieves 20% equity
When the loan is fully paid
The correct answer is: When the borrower achieves 20% equity
Private mortgage insurance (PMI) is designed to protect lenders in case the borrower defaults on their loan, particularly when the borrower has a down payment of less than 20% of the home's value. One of the key triggers for the cancellation of PMI is the achievement of 20% equity in the home. When a borrower reaches 20% equity, it signifies that they have more than 20% of the home's value. This is typically assessed based on the original loan-to-value (LTV) ratio, adjustments in home property value, or through scheduled amortization of the mortgage. Once the borrower establishes this equity threshold, they have the right to request cancellation of their PMI, as the risk to the lender decreases significantly. This requirement not only aligns with the lender’s risk management strategies but also aims to provide relief to borrowers from the added expense of PMI payments, thus potentially reducing their monthly mortgage costs. Therefore, reaching 20% equity is a critical milestone that supports the cancellation of PMI coverage.