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INFORMATION ON PRIVATE MORTGAGE INSURANCE  " PMI "

The Homeowner's Protection Act, passed by Congress in 1998, requires mortgage companies to notify borrowers who bought their homes with PMI when they can legally shed this pesky payment.

PMI has been both good and bad for borrowers. On the positive side, PMI has allowed consumers to get a mortgage even when they couldn't afford the 20% down payment that most lenders require as a minimum investment.

On the down side, PMI adds thousand of dollars to the cost of home ownership. Currently, about half of all new mortgages are saddled with mandatory PMI because the down payment was less than 20%. According to the Congressional Research Service, PMI adds $65 a month to a $100,000 mortgage loan in which the borrower put down only 5%. For homeowners who put down 10% and borrow $100,000, it adds about $43 a month.

Making PMI cancellation automatic:

The problem with PMI is that lenders haven't had to cancel the insurance automatically when the homeowner's mortgage balance fell below 80% of the loan principal. Many people continue to pay mortgage insurance for months and even years beyond the date when it should have been canceled.

The new law says that when the outstanding balance of your mortgage reaches 80% of the value of your home, you will be notified that you can cancel your PMI policy. The lenders base their 80% projections on your required payment schedule. If you make additional payments that would result in reaching the 80% level sooner, you have to track that yourself.

Even if you do nothing at all, your mortgage company is supposed to cancel all requirements for PMI automatically, once your outstanding balance on the original loan principal reaches 78%.

However, if your house has appreciated in value so that your current mortgage is less than 80% of the current market value of the house, the new law will not help you. The 80% number is based only on the original loan amount. Again, it's up to the homeowner to track price appreciation. In addition, you probably would need an appraisal to prove your home's value put your loan under the 80% threshold.

The law won't save you money if you don't have a "good payment history" on your mortgage. If you don't meet the good payment history requirements, your mortgage company can delay the PMI cancellation.

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