New borrowers who need private mortgage insurance to obtain their loans will get a money-saving break thanks to a federal law that takes effect July 29.

And now, through some policy changes issued this month, Fannie Mae and Freddie Mac will pick up where legislators left off, ordering lenders to apply some of the law's principles to existing mortgages.

The changes should make more consumers aware of when they can eliminate PMI and make it easier to do so. That could save borrowers hundreds -- or even thousands -- of dollars over the lives of their loans.

"Many people will be helped," says Bob Engelstad, senior vice president of credit policy at Fannie Mae.

"We think it is going to be a couple hundred thousand or more whose insurance will be canceled" under one provision, he adds. Plus, "The disclosure for both new loans and existing loans will prompt a lot of borrowers to look into it and make some informed decisions about whether they're in a position to cancel."

What PMI is for
PMI can make mortgages possible for many potential home buyers who don't have a lot of cash. It covers lenders in case a borrower who puts less than 20 percent down defaults, making mortgage companies willing to roll the dice on such mortgages. In fact, two out of five home buyers obtain PMI-supported loans, according to the Mortgage Insurance Companies of America, a trade association. The coverage is supposed to expire when the borrower surpasses 20 percent equity.

Yet, out of ignorance or lender malfeasance, many people have ended up paying PMI premiums long after they cross the 20 percent threshold. For years, that led to angry phone calls and heated debates, but no concrete reform. Then the industry outraged the wrong person -- a member of the U.S. House of Representatives -- at the wrong time. Rep. James Hansen, R-Utah, who couldn't get a straight answer about how to eliminate PMI on his condominium near Washington, introduced the Homeowners Protection Act of 1998 that President Clinton eventually signed into law last summer.

New law's impact
Under the act, a borrower who gets a mortgage on or after July 29 can request that PMI be canceled once the loan is reduced to 80 percent of the home's value. At 78 percent loan-to-value, or LTV, the lender must cancel the coverage automatically. On a $100,000 home with $10,000 down, PMI might cost about $40 a month. So someone who had the insurance eliminated would spend $480 a year less than someone who forgot the coverage was there.

Other changes for new homeowners also will take effect.

Since last year, however, existing homeowners have remained in limbo while industry officials figured out how to treat outstanding loans. Those deliberations have now culminated in several changes that Fannie Mae and Freddie Mac -- along with lenders who sell loans to them -- will implement during the next few months. They aren't as consumer-friendly as the ones that apply to new borrowers, but they should still make life easier to people who already have mortgages.

Effect on existing loans
For instance, existing homeowners won't have their PMI canceled automatically once they reach the 78 percent LTV mark. Officials say that's because lender computer systems wouldn't have been able to track a person's paydown progress against the original home value in some cases. Instead, people will have the insurance terminated for them at the midpoint of their loan term.

"On a 30-year loan, once it gets to 15 years, PMI would be automatically canceled," Engelstad says.

By comparison, a new homeowner getting a $112,500 mortgage on a $125,000 home would pass 78 percent LTV, or $97,500, in nine years and eight months. That assumes the interest rate was 7.11 percent -- the national average 30-year fixed mortgage rate found by a May 24 Bankrate.com survey -- and that no extra principal payments were made.

Why the delay? Y2K
There's another downside to this policy too. Since Fannie Mae and Freddie Mac didn't want mortgage companies to face the PMI modifications and Year 2000 changes at the same time, they're not forcing lenders to comply right away.

"Because of Y2K considerations and what have you, the time it takes to set up systems, etcetera, we're not making it mandatory until January 2, 2001," says Albert LeQuang, manager of mortgage credit policy for Freddie Mac.

The news isn't all bad, however. Lenders have the option to implement the change immediately, and LeQuang says some have indicated they will do so. Plus, the agencies are making it easier for borrowers to cancel PMI on their own.

For example, Freddie Mac used to require a loan be on the books for at least two years before it could qualify for insurance cancellation. That's no longer the case, thanks to a policy change in early May.

"When the LTV ratio reaches 80 percent or less, based on the original value of the property, there no longer is a mandatory waiting period," LeQuang says. "If you run into substantial income or you hit the lotto or whatever and you bring in some money and reduce the amount due, then you don't have to wait the two years."

Some adjustable-rate borrowers used to have to wait at least a year after their last payment adjustment in order to qualify for an insurance removal, but Freddie Mac eliminated that requirement as well.

Another minor change makes it easier for borrowers who have just barely missed a couple of payments to qualify for PMI cancellation. In the past, somebody couldn't have had more than one late charge in the past year. Those charges kick in between 16 and 29 days after a payment is due. Now, it doesn't matter how many times borrowers are that late, as long as they haven't been 30 days late in the past 12 months or 60 days late in the past 24 months.

Because of the complex nature of some of these changes and the different compliance deadlines that apply to them, experts say borrowers should go ahead and request PMI cancellation if they think they might be eligible. That holds especially true for people who have made extra mortgage payments to lower their principal balance and people who find out home values are appreciating in their area. Either a rise in home values or a fall in principal balance adds to equity and draws the 20 percent PMI finish line closer.

Borrowers should realize, however, that these new rules only apply to loans sold to Fannie Mae and Freddie Mac, not those which lenders hold "in portfolio." Some existing homeowners may not benefit from the changes as a result, even though most mortgages do get sold off these days.

Call lender for details
To find out which category your loan falls in, contact your original lender or the service company to whom you send the payments. Even if the mortgage hasn't been sold, though, it can't hurt to ask if the lender will voluntarily apply the new provisions anyway.

Finally, those who feared a provision in the original law that exempted so-called "high-risk" borrowers from the 78 percent cancellation benefit no longer need to worry. The secondary agencies that were left with the task of defining the term decided not to cut anyone out of the loop.

"They'll get the treatment provided for in the act without any exception," Engelstad says. "The automatic cancellation only requires the loan be current at the time."