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There's a silver lining in PMI

Questions often come up about private mortgage insurance, or PMI. It is the type of insurance that lenders usually require when the down payment on a home is less than 20 percent of the home's purchase price.

The cost of PMI depends primarily on the size of a mortgage but typically ranges from $25 to $50 a month. If the mortgage holder defaults on a loan, the insurer will reimburse the lender for at least part of the losses.

PMI payments are usually made into an impound account and factored into monthly mortgage payments. But what many homeowners don't realize is that these payments can often be eliminated after their equity stake in the property reaches 20 percent or more.

A few lenders will cancel the PMI after receiving a phone call or letter and the lender verifies that the homeowner has at least a 20 percent equity stake in the property. Others will cancel it upon receipt of a letter from one or two real estate agents estimating the current value of the home.

However, most will insist on a current appraisal of a property's value. The lender might also specify which appraiser to use.

If the lender balks at your request to cancel PMI, ask your banker whether your home loan has been sold to the Federal National Mortgage Association or the Federal Home Loan Mortgage Corp. These two government-chartered agencies purchase about 2-million loans a year from lending institutions, and both generally require lenders to cancel private mortgage insurance if certain conditions are met.

Unfortunately, not all borrowers can drop their mortgage insurance. The insurance premium on loans insured by the Federal Housing Administration _ an amount equal to 3.8 percent of the total loan amount _ usually cannot be dropped because most lenders who make the loans eventually sell them to the Government National Mortgage Association.

The GNMA, nicknamed "Ginnie Mae," pools the government-backed FHA loans it buys and then sells shares in the pools to investors. Because mortgages in the pools are backed by the federal government, so are the Ginnie Mae securities.

That makes them virtually as safe as U.S. Treasury bonds, a factor that is very attractive to safety-conscious investors.

If homeowners were allowed to drop their FHA insurance premiums, Ginnie Maes would no longer have government backing and many investors would not buy them.

Although you probably can't drop your monthly FHA insurance premium, take heart: It's essentially a "user fee" for a loan that enabled you to buy a home that you probably couldn't have afforded otherwise.