What usually happens to PMI when the borrower reaches 20% equity in their home?

When a borrower reaches 20% equity in their home, Private Mortgage Insurance (PMI) can typically be canceled. PMI is usually required by lenders when a borrower makes a down payment of less than 20% of the home's purchase price. This insurance protects the lender in case the borrower defaults on the loan.

Once the borrower’s equity reaches 20%, they have significantly reduced the lender's risk, which allows for the cancellation of PMI. Borrowers should check their loan terms, as they may need to formally request the cancellation, and some lenders might have specific requirements or processes to follow.

This dynamic is a key aspect of mortgage finance and can significantly influence the overall cost of homeownership. Recognizing when PMI can be eliminated helps borrowers save money on their monthly mortgage payments, fostering more financial efficiency in managing their home loan.

The other options do not accurately represent what occurs with PMI when a borrower achieves 20% equity in their home.