Finally, on the vexing subject of Private Mortgage Insurance, there's good news, and bad news.

PMI, as we all know, is the mortgage insurance paid for by a borrower who has made a small down payment, less than the 20 percent that banking regulations regard as safe from the lender's point of view. Used with conventional mortgages, it protects the lender in case of default. (FHA and VA mortgages carry a different sort of protection for the lender; we'll come to that in a moment.)

Over the years, my column has received all sorts of letters from borrowers who are sure they should be allowed to drop their PMI.

There are those who don't understand the term "mortgage insurance" at all. They're apt to write indignantly that they can buy enough life insurance to cover the mortgage debt on their own, at less cost than "the bank" is charging. I have to inform them that PMI is not the same as life insurance, and that it protects the lender, not them, even though they pay the premiums. And no, if they default they'll still be liable, even though the insurance company may reimburse the lender.

But the most legitimate complaints come from those who say their equity now far exceeds 20 percent, and they're not getting anywhere in trying to drop PMI coverage. Often they protest that their lender requires them to pay for a new appraisal, or even two, before considering the request. And it's seldom clear whether the 20 percent equity is to be of current value or original purchase price.

In a few areas, state law addresses the problem. But now, Uncle has finally stepped in.

Beginning July 29, 1999, PMI can be dropped when equity reaches 20 percent of original value, if the borrower requests it. And when equity reaches 22 percent, the lender must drop the insurance automatically. (That assumes, of course, that payments are current at that point.)

The bad news is that the new regulations apply only to new conventional mortgages placed after July 29. But one cheering note is that lenders will now be required to send annual notices to both old and new borrowers with cancelable PMI, explaining just what the qualifications are for dropping the coverage.

FHA mortgages, of course, carry HUD's own mortgage insurance premium (MIP, with an unfortunately confusing acronym.) How many years it must be carried depends on the size of the borrower's original down payment, and the new law does not apply to FHA loans.

VA loans have no mortgage premium to cancel. They are guaranteed to the lender by the federal government, at no extra cost to the veteran.

However complex and delayed in their effect, the new laws do offer a light at the end of the tunnel. As they might say on a tv ad -- PMI relief is in sight!

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Published: July 1, 1999

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