To understand what PMI is, it's important to understand how lenders work. With a decent credit rating almost any potential buyer can secure a loan on a home here in Pennsylvania. There is a very important reason for this: the loan is secured by the home, a very valuable asset. Should there be a default by the borrower the risk for the lender is usually only the difference between the value of the home and the outstanding amount on the loan, less of course the amount it costs for them to foreclose the property and resell it.

This is why lending more than a certain percentage of the value of the home makes lenders wary. Usually the amount is around 80 percent of the value. The 20% cushion of equity helps ensure their losses are kept to a minimum should there be a default on the loan.

Smaller down payments have become much more common which means the lenders are taking more of a risk. PMI, or Private Mortgage Insurance, helps offset this risk by making a supplemental policy in case the borrower defaults on the loan and the balance is greater than the value of the house.

By rolling the amount of the insurance (which can be around $40-$50 per month for a $100,000 house) into the mortgage payment it is often overlooked or even unnoticed. Even after the loan balance has dropped below the 80 percent original threshold homeowners continue to pay the PMI as it can often take years to reach that point as the home owner pays down the principal. It occurs naturally and until recently there was no obligation for lenders to tell home owners when they'd reached that point.

In 1999 all that changed, when the Homeowners Protection Act took effect. This law now obligates lenders to terminate the PMI, in most cases, once the principal balance reaches 78 percent of the original loan amount. Savvy homeowners can, upon request to the mortgage company, have their PMI come off the loan when the principal amount reaches 80 percent as long as the home loan closed after July of 1999 as well as certain other conditions are met, including but not exclusive to being current on the loan payments. The PMI can be removed for buyers that purchased before July 1999 but the buyer must initiate the process and although the lender is under no obligation to do so, most will.

There is another way that equity can reach beyond the 80/20 percent ratio. Here in the Pittsburgh and Western Pennsylvania area there have been gains in the value of real estate over the past decade. Many people are finding that their property has quickly grown to the point that their loan principal owed is less than 80 percent of the current value. The lenders are, in these cases, under no legal obligation to remove the PMI but often agree to remove the extra fees as long as the home owner does not represent an exceptional risk and they have been prompt on their loan payments.

A licensed real estate appraiser can help a home owner know just when their home equity rises above the 20 percent point which will allow them to make the request. They are actively watching the Pennsylvania market and it's their job to know the dynamics of the market in their area so that they know when the property values have risen or declined. The money saved by dropping the PMI pays for the appraisal in a matter of months which enables the homeowner to enjoy the savings from then on.