Private Mortgage Insurance: It’s Not Easy to Drop

Many homeowners are saving thousands of dollars thanks to new rules that make it easier to get rid of private mortgage insurance.

Unfortunately, some lenders make it harder than others to escape the dreaded PMI, which typically adds $20 to $180 to monthly mortgage payments. Sometimes consumers have to wade through a sea of misinformation and red tape to find out who is eligible and who is not.

Lenders generally require PMI when a mortgage equals more than 80% of the value; although borrowers pay the premium, the purpose of PMI is to insure the lender in case the borrower defaults. In recent years, many lenders were criticized for failing to drop PMI even after borrowers had paid down their loans to well below the 80% mark.

In July 1999, a new federal law kicked in making it easier to delete PMI on certain loans. Two influential mortgage financing agencies, Fannie Mae and Freddie Mac, also directed their lenders to loosen requirements for getting rid of PMI.

The law Congress passed affects only home loans made after July 29, 1999, and requires lenders to waive PMI only when the amount owed reaches 80% of the original property value--the value at the time the home was purchased or appraised for a refinancing. The home’s current value isn’t taken into account. Lenders are required to automatically cancel PMI when the loan value reaches 78% of the purchase price.

Fannie Mae and Freddie Mac, which purchase home loans for sale to investors, adopted much more lenient standards for dropping PMI and applied them to all the loans on their books, not just those made since July. The government-chartered corporations directed their lenders to take current value into consideration when borrowers ask to have PMI canceled. As with the federal law, only borrowers who are up to date on their payments need apply.

Fannie Mae and Freddie Mac purchase more than half of the home loans made in the U.S., so their policies were expected to have widespread impact.

Bankruptcy paralegal Fran Russell had to pay PMI when she refinanced her Irvine townhouse in January 1999; the loan was for 90% of the home’s $231,000 appraised value.

Because Russell’s home is now worth more than $260,000--thanks to strong growth in home prices in her area--she contacted her loan servicer, ABN Amro Mortgage Group Inc., recently to get her $81.49 PMI payment removed.

No dice, the company responded in a letter. Russell was told she would have to pay down the debt to 80% of the home’s original appraised value. That would mean making regular payments for seven more years, or writing a check for $20,988 to reduce the principal of the loan, before PMI could be canceled.

PMI policies are ultimately determined by the investor who buys the loan. Although most mortgages are sold to Fannie Mae and Freddie Mac, private investors and banks own the rest, and their policies on PMI might be more conservative.

In fact, when Russell called to inquire who owned the loan, she said she was told--erroneously--that the loan was owned by ABN Amro affiliate Standard Federal Bank, the mortgage lender that had originally made the loan.

The problem is that Standard Federal uses Fannie Mae guidelines even on the loans it keeps for its own portfolio, said bank spokesman Vince Carducci. And, it turns out, Russell’s loan wasn’t kept at all; it was sold to Fannie Mae, Carducci said.

It’s unclear whether Russell would have gotten the correct information had a reporter not intervened on her behalf. In any case, it proves the importance of being persistent with lenders, especially when something as potentially expensive as PMI is involved.

Russell will still have to wait until her loan is at least 2 years old before she can ask for PMI to be waived. Under Fannie Mae guidelines, borrowers can ask for PMI cancellation when the mortgage equals 80% of the current value if the loan is more than 5 years old, or 75% if the loan is 2 to 5 years old. PMI is automatically canceled when the loan reaches its midpoint--15 years for a 30-year loan, 7.5 years for a 15-year loan. To verify the value, the lender will order an appraisal, which should cost Russell about $300.

But given decent market appreciation and a few extra payments on her loan’s principal, Russell could be freed of PMI within a year--a move that could save her as much as $6,000.

Note to Readers

A Feb. 11 column about community property quoted James Ellis, chairman of the California Bar Assn.’s estate planning, trust and probate law section, who said that accounts and real estate must be titled as community property to get a beneficial tax treatment known as a double step-up in basis.

Ellis has since talked to attorneys who have used written agreements to supersede the form of title and agrees with them that couples can get the tax advantage for property held in joint tenancy if they use a formal written agreement that the property should be treated as community property for tax purposes. For more information, contact an estate-planning attorney familiar with community property law.

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Liz Pulliam Weston is a personal finance writer for The Times and a graduate of the personal financial planning certificate program at UC Irvine. Questions can be sent to her at liz.pulliam@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. She regrets that she cannot respond personally to queries. For past Money Talk questions and answers, visit The Times’ Web site at https://www.latimes.com/moneytalk.

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Getting PMI Removed

New rules make it easier to cancel private mortgage insurance, which lenders typically require when borrowers make a down payment worth less than 20% of the home’s price. Here’s what you need to know:

1. Stay up to date on your loan payments. Typically, homeowners must not have had any payments 30 days or more past due within the last 12 months or 60 days or more past due in the last 24 months.

2. Contact your lender to see who owns your loan and what the investor’s policy is on removing PMI. If your loan was sold to mortgage agencies Fannie Mae or Freddie Mac, you can check with the agency for more details. Fannie Mae’s number is (800) 732-6643, and Freddie Mac’s number is (800) 373-3343.

3. If your loan is owned by either Fannie Mae or Freddie Mac, the criteria for canceling PMI depend on the loan’s age. If the loan is 2 to 5 years old, you may request PMI be canceled when the value of the loan reaches 75% of the home’s current market value. If the loan is more than 5 years old, you can request cancellation when the loan reaches 80% of the home’s current market value.

4. If the loan is not owned by either agency, the guidelines are set by whatever investor bought the loan. If the loan was made after July 29, 1999, however, a federal law requires that PMI be canceled at your request when the loan’s value reaches 80% of the purchase price. Cancellation is automatic when the value reaches 78% of the purchase price.

5. If your loan meets the investor’s criteria for removing PMI, ask the lender to start the process of getting it removed. The lender must order the appraisal or broker’s opinion; if you order one on your own, you’ll end up paying twice.