Private mortgage insurance hard to drop

Many homeowners are saving thousands of dollars thanks to new rules that make it easier to get rid of private mortgage insurance (PMI).

Unfortunately, some lenders make it harder than others to escape the dreaded PMI, which typically adds $20 to $180 to monthly mortgage payments. Sometimes consumers have to wade through a sea of misinformation and red tape to find out who is eligible and who is not.

Lenders generally require PMI when a mortgage equals more than 80 percent of the home's value; although borrowers pay the premium, the purpose of PMI is to insure the lender in case the borrower defaults. In recent years, many lenders were criticized for failing to drop PMI even after borrowers had paid down their loans to well below the 80 percent mark.

In July, a federal law kicked in, making it easier to delete PMI on certain loans. Two influential mortgage-financing agencies, Fannie Mae and Freddie Mac, also directed their lenders to loosen requirements for getting rid of PMI.

The law affects only home loans made after July 29, 1999, and requires lenders to waive PMI only when the amount owed is 80 percent of the original property value - the value at the time the home was purchased or appraised for a refinancing. The home's current value isn't taken into account. Lenders are required to cancel PMI when the loan value reaches 78 percent of the purchase price.

Fannie Mae and Freddie Mac, which purchase home loans for sale to investors, adopted much more lenient standards for dropping PMI and applied them to all the loans on their books, not just those made since July. The government-chartered corporations directed their lenders to take current value into consideration when borrowers ask to have PMI canceled. As with the federal law, only borrowers who are up to date on their payments need apply.

Fannie Mae and Freddie Mac purchase more than half of the home loans made in the United States, so their policies were expected to have widespread impact.

Bankruptcy paralegal Fran Russell had to pay PMI when she refinanced her Irvine, Calif., townhouse in January 1999; the loan was for 90 percent of the home's $231,000 appraised value.

Because Russell's home is now worth more than $260,000 - thanks to strong growth in home prices in her area - she recently contacted her loan servicer, ABN Amro Mortgage Group, to get her $81.49 PMI payment removed.

No dice, the company responded in a letter. Russell was told she would have to pay down the debt to 80 percent of the home's original appraised value. That would mean making regular payments for seven more years, or writing a check for $20,988 to reduce the principal of the loan, before PMI could be canceled.

PMI policies ultimately are determined by the investor who buys the loan. Although most mortgages are sold to Fannie Mae and Freddie Mac, private investors and banks own the rest, and their policies on PMI might be more conservative.

In fact, when Russell called to inquire who owned the loan, she said she was told - erroneously - that it was owned by ABN Amro affiliate Standard Federal Bank, the mortgage lender that originally made the loan.

The problem is that Standard Federal uses Fannie Mae guidelines even on the loans it keeps for its own portfolio, said bank spokesman Vince Carducci. And, it turns out, Russell's loan wasn't kept at all; it was sold to Fannie Mae, Carducci said.

Russell still must wait until her loan is at least 2 years old before she can ask for PMI to be waived.Her situation proves the importance of being persistent with lenders, especially when something as potentially expensive as PMI is involved.

Under Fannie Mae guidelines, borrowers can ask for PMI cancellation when the mortgage equals 80 percent of the current value if the loan is more than 5 years old, or 75 percent if the loan is 2 to 5 years old. PMI is automatically canceled when the loan reaches its midpoint - 15 years for a 30-year loan, 7.5 years for a 15-year loan. To verify the value, the lender will order an appraisal, which should cost Russell about $300.

But given decent market appreciation and a few extra payments on her loan's principal, Russell could be freed of PMI within a year - a move that could save her as much as $6,000.<>