American homeowners overpay millions of dollars a year in unnecessary private mortgage insurance.

Thanks to the Homeowners Protection Act, which goes into effect today, American homeowners will continue to overpay millions of dollars a year.

The law establishes when homeowners stuck with the insurance, called PMI, can get rid of it. Borrowers can request that PMI be canceled when they pay down the principal balance of their mortgage loans to 80 percent of the purchase price. Lenders must automatically cancel PMI when the balance hits 78 percent. But the act has substantial holes in it:

• It only applies to new mortgages, signed on or after July 29.
• It ignores how the appreciation in value adds to equity, which ought to make PMI disappear sooner.
• It does, however, protect lenders from having to cancel PMI if a home goes down in value.

So the bottom line for homeowners and home buyers, then, is the same today as it was yesterday: Stay on the ball, watch the value of your home and ask your lenders to drop PMI as soon as you can. If your home appreciates in value, you could be paying too much for years before the protections of the new federal law kick in.

What PMI does
PMI is the friend of homeowners who are caught short on their down payments for conventional mortgages. Borrowers who can't afford at least 20 percent down have to get PMI to get their mortgages. The borrower pays it, but the lender gets the benefit -- PMI assures the lenders will get back their money if the borrower defaults. People who don't have a big stake in their homes are considered a higher risk; PMI is a policy that persuades lenders to take that risk.

About 1.5 million of the 4.97 million home buyers in 1998 were saddled with PMI policies.

They're not cheap. Under the current rates from one large company, PMI costs about $39 a month for someone who puts down 10 percent on a $100,000 home; $62 a month at 5 percent down.

The coverage is supposed to expire when the borrower surpasses 20 percent equity -- just like the homeowner who put 20 percent down, a homeowner with a 20 percent equity stake in a property is considered a good enough risk to do without the extra insurance.

But PMI is often a friend that stays around too long.

Early payments on an amortized loan are mostly interest, so it takes years before home buyers pay down their mortgages to 80 percent of the purchase price. It takes 10 years, two months with a 10 percent down loan, and 12 years, four months with a 5 percent down loan, based on a 30-year, fixed-rate mortgage taken out at 7.56 percent, the Bankrate.com national average for July 28.

But even after that point, because homeowners didn't always ask for the coverage to be dropped and lenders didn't tell them they could be, unwitting consumers are often socked with extra PMI payments for years.

Ballyhooed law
The Homeowners Protection Act of 1998 was passed to make sure PMI went away, and establishes when. The law covers mortgages originated July 29, 1999, and later.

The act adds extensive disclosure requirements to demystify PMI. It requires lenders to offer borrowers an initial written notice stating that PMI is required, and that it can be canceled at a later date. Lenders also must follow up with annual disclosure statements reminding borrowers of their right to cancel PMI. The annual disclosure requirement is the one section of the law that applies to all mortgages with cancelable PMI; the rest of the law just applies to mortgages issued today and afterward.

Lenders will also be required to refund all "unearned" PMI premiums. They will have 45 days after insurance terminates to repay any premiums they collected from borrowers for coverage beyond the date the insurance should have ended. The law leaves it up to individuals to sue for damages if lenders fail to repay them.

"The bottom line is that thousands of hardworking American homeowners overpay PMI each year because they don't know what it is or how to get rid of it," said Rep. James V. Hansen, R-Utah. He crafted the law when he had trouble getting rid of the PMI policy on his own property. "We would not let an auto mechanic charge customers for work that is not needed or a doctor charge patients for procedures that were not performed."

Law protects lenders
However, in the compromise of lawmaking, the law was set to apply only to future mortgages. It also is drawn carefully to protect lenders from having to drop PMI if homes depreciate in value. It does not, however, let consumers get rid of PMI faster if homes appreciate in value, increasing their equity. The language of the law requires that borrowers pay down the balance of the mortgage to reach "80 percent of the original value of the property" before they can ask that PMI be dropped. The law also defines the original value as the lesser of the purchase price, or the appraised value at the time of purchase.

The difference between the original value and current value is an important one: Every dollar of real estate appreciation after purchase is a dollar of equity that goes on the homeowner's side of the balance sheet.

Someone with a home originally worth $150,000, for example, who enjoyed appreciation of 4 percent a year would have a home worth more than $180,000 in just five years. That appreciation alone is enough to give that homeowner 20 percent equity, even if it was bought with no down payment at all.

Under the law, however, that lender who gave a 0 percent down, $150,000 mortgage, wouldn't have to drop PMI until 14 years and three months had passed, sticking the homeowner with more than nine years of unnecessary payments.

So what's a savvy homeowner to do? Stay on top of the property values in your neighborhood and contact your lender to ask about its policies toward PMI. Many lenders will offer to drop the PMI policy when asked, although they may first require you to pay for an appraisal to show you have reached 20 percent equity.

Several other factors enter into it -- among them, existing state laws, your payment history, compliance deadlines, the fine print in the mortgage -- so 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.