Stamford, Conn. -- More than 1 million U.S. homeowners are sending their mortgage lenders $40 to $100 more than they should each month by paying for unnecessary private mortgage insurance, according to the American Homeowners Association.
If you bought your home with a small down payment, you probably were required to protect your mortgage lender with private mortgage insurance, or PMI. For example, if you buy a $100,000 home with only
5 percent down, your PMI cost on a 30-year, fixed-rate mortgage will be about $58 a month or $700 a year.

The insurance is written by a private company to protect the mortgage lender if you default and the lender has to sell your home at a loss.

A decade or more of overpaying
In theory, you should only have to pay the PMI premium -- until you have reduced the amount of your loan to less than 80 percent of the current market value of your home. But lenders in most states are under no obligation to tell you when your loan has reached that point -- so you could wind up paying PMI premiums for 10 years or even longer. And some lenders may require you to pay $300 to $600 for a new appraisal before canceling your PMI policy.
PMI does help consumers by allowing them to buy a home without spending years saving for a 20 percent down payment. Since buyers who make low down payments have a higher rate of default on their loans, PMI allows lenders to make loans they would otherwise consider too risky.

Low down payment, higher PMI
PMI rates increase with smaller down payments. In addition, rates for adjustable rate mortgages are higher than for fixed-rate mortgages.
Many state legislators and U.S. congressmen agree that pro-consumer changes are needed. Bills are pending in both the U.S. House and the Senate that would require mortgage lenders to disclose when PMI is no longer needed, and provide a mechanism for homeowners to easily cancel their PMI policies.
"There's a great chance that it will go through this session," said Karen Kapen, associate director/counsel for the Mortgage Bankers Association of America in Washington. "Things are moving fairly rapidly now."
The PMI legislation was first filed in 1995, by Rep. Jim Hansen (R-Utah), then picked up last year by Sen. Alfonse D'Amato (R-NY). Currently, the House and Senate are working to resolve the differences between the two bills, according to Kapen.

You can stop overpaying now
But if you're a homeowner paying PMI premiums, you don't have to wait for Congress -- you can take action yourself.
"Call the mortgage servicer who handles your loan," said Ron Goldfer, partner in the Minneapolis law firm Zimmerman Reed, which has handled several class action suits relating to PMI premiums. "Every lender has slightly different rules regarding cancellation."
Some lenders require a five-year wait before PMI can be eliminated. Other common provisions include:
• A loan balance below 75 percent to 80 percent of the property value (if the property is owner occupied)
• A minimum of 12 or 24 consecutive monthly payments.
• A good payment record with no delinquencies.
• A new appraisal (paid for by the borrower).
• Borrowers with adjustable rate mortgages may be required to make a specific number of payments since their last payment increase.

Get below the PMI threshold
The key for most home buyers is reducing the loan value to less than the 75 percent to 80 percent threshold, since most of each monthly payment during the first few years of the loan is devoted to interest. However, there are several other ways to reach that magic number and be eligible to drop PMI insurance. You could:
• Make an extra payment of principal each month. Even $50 or $100 a month can mean a dramatic drop in your loan balance, as well as a steep reduction in total interest costs.
• Renovate your home, add a new room or a pool that would increase the market value of your home.
• Refinance your home with a different lender.
• Call a real estate associate familiar with your neighborhood to provide a competitive market analysis of the value of your home -- which may have increased significantly since your loan was issued.

A sound investment in your home
Investing in your home is a sound strategy, according to a recent analysis of PMI by L. Lee Colquitt, an assistant professor of finance at Auburn University, and V. Carlos Slawson Jr., an assistant professor of real estate at Louisiana State University. A $300 appraisal soon pays for itself if a $50-a-month PMI premium can be eliminated.
"Assuming that the homeowner plans to remain in the house for six months or longer, the rate of return earned on the investment in the appraisal is remarkable," said the professors in their study. "We suggest that homeowners first consider investing in home equity (or perhaps just an appraisal) and eliminating PMI premiums as an alternative to investing in other assets."