Chalk up another victory for home buyers.

Freddie Mac has announced that lenders who use the company's computerized loan processing system can start charging less private mortgage insurance on certain low down-payment loans next week.

The change -- which takes effect March 22 -- means more borrowers who get loans for greater than 80 percent of a home's value will have the chance to save a few thousand dollars in insurance premiums during the life of their loans.

"Down payments, insurance and closing costs have long been barriers to homeownership," David Glenn, Freddie Mac's president, said in a statement. "By reducing the overall costs of financing, these flexible mortgage insurance options help alleviate a major hurdle that once stood in the way of owning a home for many."

Protecting the lender
Private mortgage insurance, widely known as PMI, allows people to forego the traditional 20 percent down payment requirement by providing a way for lenders to recoup their losses if a borrower defaults. The coverage allows home buyers to get in a house with as little as 3 percent down, but carries a hefty price tag -- upward of $50 or $60 a month in premiums, depending on the size of the customer's initial payment.

Freddie Mac is the nickname for the Federal Home Loan Mortgage Corp., a financial corporation chartered by the federal government. It encourages homeownership by buying pools of mortgages from lenders and selling securities backed by these mortgages.

Since Freddie Mac buys many of these risky loans from lenders, it sets rules that govern the amount of the mortgage balance that needs to be covered by PMI.

Traditionally, a borrower had to buy insurance for up to 35 percent of the loan. The PMI payments continued until the borrower made enough mortgage payments to whittle down the loan's principal balance to less than 80 percent of the home's value. That takes many years on longer-term mortgages because early year payments go mostly toward interest, not paying down the principal. Plus, borrowers sometimes forget about the coverage altogether and end up paying longer than they have to because they don't request that it be canceled.

A federal law that will affect mortgages originated after July 29, 1999, however, requires lenders to cancel PMI on most loans once the balance shrinks to 78 percent loan-to-value, so that shouldn't be a problem in the future.

A pair of options
Under the new Freddie Mac guidelines, borrowers will have two options to lower their costs. They can either go with a slightly reduced PMI amount to save some money, or choose to pay even less insurance in exchange for accepting a higher interest rate or paying an extra fee at closing.

The first option will be available exclusively on 30-year fixed loans with 5 percent or 10 percent down. The latter choices will apply to several types of fixed- and adjustable-rate loans.

In either case, a borrower will have to get the loan from a lender that uses Freddie Mac's Loan Prospector computer system, which takes application information electronically, analyzes it and recommends whether a loan should be approved. Freddie Mac processed roughly 2.1 million loans through the system last year, according to spokeswoman Kimberly Stein.

The savings available from the new programs add up over time. Consider a 30-year, fixed-rate, 7 percent mortgage for $100,000, with a 5 percent down payment. Freddie Mac estimates PMI on this loan would normally cost a borrower $65 a month. After making regular payments for almost 12 years, the borrower would have achieved 22 percent equity -- and freedom from PMI -- at a cost of $9,230.

By paying $750 to the lender up front, that person could cut the amount of the loan balance that needs to be covered to 18 percent from 30 percent. Even after discounting the fee, that would save $2,800 in premiums over the life of the loan.

The move from Freddie Mac follows Fannie Mae's announcement in January that it planned to require less mortgage insurance on certain loans processed through its Desktop Underwriter system. Those reductions took effect the second week of March, according to spokesman Gene Eisman.