The new law requiring cancellation of private mortgage insurance that took effect July 29, 1999, should be considered nothing more than a fail safe mechanism. With decent appreciation, borrowers who are required to pay for mortgage insurance because they are putting up less than 20 percent of the purchase out of their own pockets should be able to drop coverage well before the law kicks in.

Under the Homeowners Protection Act, which was passed by Congress last year, lenders must cancel PMI at the borrower's written request their loan is paid down to 80 percent of the original value of the house. You must be up-to-date on your mortgage payments, have no other loans on the house, and the lender must be satisfied the property's value has not declined. But otherwise, coverage must be dropped.

Even if you forget to ask, though, the law requires that coverage must be terminated when your loan balance reaches 78 percent of your home's original value. Again, you have to be up-to-date on your payments. But even if you aren't current, coverage must be dropped when you do catch up. And you don't have to lift a finger. Cancellation will be automatic.

Still, that won't occur until somewhere around the mid-point of your mortgage -- say between the 12th and 15th years on a 30-year loan, depending on how much you borrowed and at what rate. And under new rules adopted by Fannie Mae and Freddie Mac, the secondary mortgage market giants, you should be able to do much better.

Fannie Mae and Freddie Mac keep mortgage money flowing by purchasing loans from local lenders. They don't buy every loan. But they are powerful enough that most lenders follow their edicts. And the two government-chartered corporations have ordered lenders to terminate PMI based on current value as opposed to original value. Freddie Mac won't even require you to pay $250-$300 for an appraisal to determine what your home is worth. A simple real estate broker's price opinion, perhaps a $20-$30 expense, will suffice.

Better yet, whereas the new law applies only to loans closed on July 29, 1999 and after, both companies have extended their rules to include loans already on the books. Furthermore, their new policies cover investment properties and second home, not just primary residences. "We believe homeowners should not have to pay for private mortgage insurance that is not necessary, including existing home owners," says Robert Engelstad, Fannie Mae's senior vice president for credit policy.

Because Fannie and Freddie have revised their rules, the new PMI cancellation law should be considered nothing more than a backstop for forgetful or lazy home owners.

"The law takes some of the crap-shot element out of it, but that's not a reason to leave everything on auto-pilot," says Brian Smith of America s Community Bankers, a trade association of savings institutions. "Borrowers should always be pro-active," agrees Vicki Vidal of the Mortgage Bankers Association. Call your lender to find out what the rules are.

Nevertheless, the new consumer-friendly cancellation law does go a long way towards explaining PMI and demystifying the termination process. And it should help in reminding you that you have coverage and that it can be dropped.

Initially, lenders are now required to disclose your mortgage insurance options and explain the differences in cost for each choice. For example, there are several different ways to pay the freight, including as a single-premium financed as part of the loan amount or monthly as part of your regular house payment.

There's also a choice between borrower-paid and lender-paid coverage. If you opt to pay the premium, you can drop coverage later. If the lender pays the premium, you won t be able to cancel. But the cost will be somewhat lower. And it will be quoted as part of your mortgage rate, so the fee will be tax deductible. If you pay the premiums yourself, the cost is not considered interest and is not a write-off.

In addition, the law not only requires lenders to give you written notification at closing that you have mortgage insurance and that you have the right to cancel at a certain point, it also compels them to send you annual reminders that you have the right to terminate coverage once you meet the cancellation requirements.

But again, you shouldn't wait for lenders to discontinue coverage on your behalf. Rather, you should take the yearly notices as your cue to start looking into what your house is now worth.

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Published: August 2, 1999

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When Lew Sichelman first started writing about housing in 1969, he was the youngest real estate writer in the country. Now, 37 years later, he's one of the oldest -- and most decorated. He has been rated the top housing columnist in the country by the National Association of Realtors as well as by his peers in the National Association of Real Estate Editors. Indeed, NAREE has recognized his work on numerous occasions. One year - due to his advancing age, he can't recall which one - he earned top honors in the annual NAREE Journalism Contest in three out of the four major writing categories. It was the first time one writer has won so many NAREE awards in a single year. Known for his ability to make even the most difficult topics understandable, Sichelman also has been honored by the National Association of Home Builders and the Mortgage Bankers Association. He began providing in-depth coverage of and consumer-oriented information about housing and housing finance at the Washington Daily News, where he was real estate editor. He held that same position for nine more years at the Washington Star, which purchased the News in 1972. The Star, a so-called "writer's newspaper" which also had the misfortune of being an evening paper, was put out of its misery in 1981, and Sichelman, who had begun self-syndicating his column in 1978, decided to become a full-time columnist. Today, his column, "The Housing Scene," is distributed by United Media to newspapers throughout the country. He also is on the staff of National Mortgage News, an independent newspaper which is considered the bible of the mortgage business. And he writes for numerous other publications, including MarketWatch.com, where he answers readers questions once a week, Sports Illustrated (don't ask), RealtyTimes.com, BigBuilder and others. Sichelman is married, the father of five and grandfather of eleven.