Nationwide Mortgage Licensing System (NMLS) Practice Exam

At what loan-to-value percentage is Private Mortgage Insurance automatically canceled?

1. 55%

2. 70%

3. 78%

4. 80%

The correct answer is: 78%

Private Mortgage Insurance (PMI) is automatically canceled when the loan-to-value (LTV) ratio reaches 78% or lower. This means that when the borrower has paid down the mortgage so that the remaining balance is 78% or less of the original appraised value of the home, PMI is no longer required. This cancellation is mandated by the Homeowners Protection Act, which aims to protect consumers from unnecessary charges after they have built sufficient equity in their home. The rationale behind this threshold is that borrowers who have at least 22% equity in their home are considered to be at lower risk for default, which is why lenders do not require mortgage insurance beyond this point. This helps reduce the overall costs for homeowners once they have established enough equity. In contrast, the other percentages provided do not reflect the standard LTV requirement for automatic cancellation of PMI. Hence, the correct choice highlights a significant regulation that benefits homeowners by alleviating financial burdens once they achieve a certain level of equity in their property.