It is somewhat easier to be rid of your PMI

MAILBAG

August 29, 1999

Several readers have been asking when they can cancel their private mortgage insurance.

When a homebuyer's down payment is less than 20 percent of the purchase price, the lender often requires the homebuyer to purchase private mortgage insurance, or PMI. PMI protects the lender against a deficiency in case the borrower defaults and the home does not bring enough money at a foreclosure sale to pay the lender in full.

PMI is expensive -- $25 to $65 a month on a $100,000 loan. The cost of PMI is added into the homebuyer's monthly mortgage payment.

Until recently, lenders could establish their own guidelines as to when a homeowner could cancel PMI. Although most lenders allowed borrowers to cancel their PMI after the loan was reduced to 80 percent of the home's value, the homeowner had to request termination and obtain a current valuation of the property. Lenders had no obligation to tell borrowers about their right to cancel PMI.

A new federal law, effective last month, provides relief for folks who take out new mortgages or refinance loans after July 29, 1999. The Homeowners Protection Act of 1998 forces mortgage lenders to terminate PMI automatically once the borrower has paid down the loan to the point where it equals 78 percent of the original purchase price.

For example, when a buyer purchases a home for $100,000 and finances $95,000, the required PMI will terminate automatically when the loan principal has been paid down to $78,000. To qualify for PMI cancellation, the borrower must not have any late payments and can have no other loans on the home.

The new law also requires lenders to send borrowers an annual notice, advising them of their rights to cancel PMI. Those borrowers with PMI loans prior to July 29 will also receive this notice.

Fannie Mae and Freddie Mac, the two federally chartered companies that buy mortgages from lenders, have indicated they will allow PMI to be canceled automatically once a mortgage reaches the midway point in its term.

Under Fannie Mae guidelines, borrowers with loans originated before July 29 may cancel PMI when their principal balance is reduced to 80 percent of the home's value, provided they haven't paid their mortgage late.

The new law does not apply to FHA- or Veterans Affairs-guaranteed loans. These loans are subject to entirely different rules.

As an alternative to PMI, some homebuyers are financing their purchase with an 80 percent first mortgage and a second mortgage of 5 percent to 15 percent of the purchase price. Because the first mortgage lender is advancing only 80 percent of the original purchase price, no PMI is required. Although the second mortgage carries a higher interest rate, it may be less than the monthly PMI premium.

Are PMI premiums tax-deductible, like mortgage interest? There is no definite Internal Revenue Service ruling on this question. Have your tax adviser check current IRS regulations and rulings carefully to see whether you can take an income tax deduction for PMI.

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