Private Mortgage Insurance (PMI) is an insurance policy that is taken out by you for the benefit of your lender. The PMI protects your lender in the event that you default on you mortgage which leads to your home being foreclosed. If the lender sells your home to recover the loan amount owed to them and the sale price of the property doesn't cover the debt, the lender can claim against the insurance policy to recover the rest.

When making a down payment of less than 20%, the majority of conventional mortgage lenders require private mortgage insurance (PMI). However, since 1999, federal regulations now provide two methods for the elimination of PMI on most loans:

• The PMI requirement will be dropped automatically when the loan balance is 78% of the original purchase price.
• If your home has sufficiently appreciated in value such that your loan balance represents 80% or less of the current market value, you can ask your lender to drop the PMI requirement. In this age of rising house prices, this means that PMI can be eliminated in as little as 1 to 2 years. The current value must be determined by an appraisal, performed by the bank, at your expense, and will cost approximately $300. Before requesting a bank appraisal, it's a good idea to ask your realtor to determine the price range for homes similar to yours that have sold and closed within the past six months.