There are costs for PMI coverage (hey, it's insurance), typically monthly premiums based on the amount of outstanding debt. For cost details and payment options, speak with brokers and lenders.

So far we've seen that with 20 percent down you don't need PMI. But what happens if you buy will little down and the value of your property increases so that you now have 20 percent equity? Should not PMI coverage end?

Assuming full and timely payments, the logical and obvious answer is yes.

Which brings us to the HomeOwners Protection Act of 1998 (HPA), legislation that covers mortgages originated after July 29, 1999 for the purchase, initial construction, or refinancing of a borrower's one-family principal residence. It provides that if the borrower has a good payment history, then once the original debt has been reduced to 78 percent of the original purchase price must be canceled.

The rules also allow borrowers to request PMI cancellation after they have reduced their loans 20 percent. However, in addition the guidelines also permit lenders to retain PMI coverage for 15 years in the case of so-called "high risk" loans.

The HPA requires lenders to notify borrowers about their cancellation rights. In addition, the MICA site has cancellation information online.

If you look at the HPA standards you can see that they exclude mortgages made before July 29, 1999 -- tens of millions of loans. The standards also do not apply to FHA loans, mortgages which require insurance payments throughout the entire loan term -- a policy that may explain why FHA has a cumulative surplus of $16 billion.

The new rules relate the cancellation of PMI to a reduction of the original loan amount -- not the difference between the current loan balance and the property's present value. This means if you borrow $100,000 at 8 percent interest over 30 years, you'll pay $733.76 a month for principal and interest. The loan balance will not dip below $78,000 until 14 years and six months later. By then, most likely, you will have sold or refinanced the home.

Is there any reason lenders cannot adopt standards which are more liberal and reasonable than the federal guidelines? No. And the good news is that many loans allow for early PMI cancellation.

As examples, Fannie Mae and Freddie Mac buy loans from local lenders. Their rules establish standard practices for lenders nationwide, and when it comes to canceling PMI both have adopted guidelines which are well within the realm of reason.

Fannie Mae and Freddie Mac say this: If you have a loan they own, if you have a good payment history, if the loan-to-value ratio of your home is not greater than 80 percent, and if you ask, then there is a good case to cancel PMI coverage.

Let's look at these standards individually.

• Both Fannie Mae and Freddie Mac consider how much you owe versus the property's value, not just a reduction in the loan balance. This means you may have owned a home for five years, paid down relatively little on the mortgage (because home loans are interest-heavy up front), but seen home values rise. Between your original down payment, amortization, and rising property values you now have 20 percent equity. With good credit you may well be able to cancel PMI.

• How do Fannie Mae and Freddie Mac know what your home is worth? They don't. This means you must be able to show that your home has a given value. The way this is done is by having an appraiser approved by your lender value the property.

• What's an "acceptable payment record?" Freddie Mac says borrowers must have no late payments for the past two years. What's a "late payment?" A payment at least 30 days overdue. For Fannie Mae, good credit means no payments 30 days late for at least one year and no payments 60 days late for two years.

• Implicit in these rules is a period for loans to "season." This means if your home suddenly shoots up in value three days after you move in, you should still expect to continue PMI payments. Under Fannie Mae's rules, for instance, a loan must season five years if a cancellation is sought with 20 percent equity, but only two years for 25 percent equity.

• The cancellation request rules for both Fannie Mae and Freddie Mac apply to loans made before July 29, 1999. This means there are cancellation opportunities for millions of homeowners.

• If you have an older loan (one made before July 29, 1999), do not request cancellation, and your loan balance has been reduced to 78 percent of its original value then PMI coverage will likely end early next year. By January 2, 2001, older loans with sufficient mortgage reductions should see PMI premiums canceled automatically if such loans are owned by Fannie Mae or Freddie Mac.

• The PMI cancellation standards do not apply to FHA financing because federal rules require insurance payments for the entire loan term in most cases.

• To get PMI canceled early, you must take the initiative and contact the lender who collects your payments. Ask who owns your loan. If not Fannie Mae or Freddie Mac, check the policies of the loan holder. Many are also updating PMI cancellation standards.

The effect of the Fannie Mae and Freddie Mac rules is this: Whether your equity comes from a down payment when you first buy or from equity accumulated over a period of years shouldn't matter -- 20 percent is still 20 percent, and if you have 20 percent equity and good credit you shouldn't have to pay PMI fees.

Follow-Up

Last week I wrote about HUD's claims, published on the front page of The Washington Post, that Fannie Mae and Freddie Mac allegedly have discriminatory lending policies. The Post has now published a rebuttal from Fannie Mae Chairman Franklin Raines that ought to be read.

"The Post," writes Raines, "cited HUD data that is too unreliable to support the assertion that Fannie Mae fails to lead the market in lending to African Americans, let alone that it 'hurts' them. For instance, in 1998 the borrowers of 426,000 loans we purchased identified themselves as members of minority groups. But another 250,000 borrowers chose not to reveal their race. So the actual number of African Americans we served could have been significantly different from the number The Post cites with such assurance.

"Worse than the shaky statistics is the lack of any proof of causation. Fannie Mae does not originate loans, lenders do. And lenders may choose not to sell us the loans, preferring instead to keep them in their own portfolios or sell them to Wall Street. Moreover, some loans do not carry mortgage insurance, which we must require as a matter of federal law."

The Common-Sense Mortgage

The latest edition of The Common-Sense Mortgage -- in its second printing since September -- is now available in bookstores online and off. In print for nearly 15 years and widely recognized as the standard consumer guide to real estate financing, it's described by syndicated columnist Robert Bruss as "an encyclopedic, detailed summary of just about everything real-estate investors, agents, lenders and borrowers want and need to know about mortgages."

"On my scale of one to 10," says Bruss, "this superb book rates a 10."

"This continues to be the most, lucid, comprehensive treatment of the subject on the market," says The Real Estate Professional. "If you want solid, reliable information about residential real estate financing, written in a thoughtful, convincing style, this is your source."

For additional information, press here.

Question Of The Week

Q Is there somewhere on the Internet where I can download a land contract form?

A I guess that there must be such a form online, but whether it's there or not is a secondary issue.

Is the form you download current? Is it appropriate in your state and your community -- or is it void or voidable? Does it favor the buyer? The seller?

Does it say what happens to your equity if a payment is late? If you make improvements and cannot buy, are you compensated? Are you getting any tax write-offs? If the place burns down, who gets the insurance for repairs? Is your arrangement recorded in the public records? Etc.

Forms are useful to study and consider, but you would be vastly better off by speaking with a broker or attorney, as appropriate, before signing a document that may not meet your needs or protect your interests.

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