Your Mortgage : Buyers With Low Downs Pay to Protect Lender : Insurance: Homeowners can have PMI dropped when their home equity reaches 20%.

If you bought your house with a down payment of less than 20% of the purchase price, or if you plan to buy a home with less than 20%, then you need to know about private mortgage insurance.

“A lot of people confuse PMI with credit-life insurance, but they’re two totally different things,” said Suzanne C. Hutchinson, an executive with the Mortgage Insurance Cos. of America.

Hutchinson’s trade group represents several private mortgage-insurers across the nation.

Credit-life insurance policies are offered by many lenders, but you usually aren’t required to purchase such a policy in order to get the loan.

If you die, the credit-life policy pays off some or all of the mortgage on your home--thus easing the financial burden that may be placed on your survivors.

Private-mortgage insurance is entirely different. When you buy a PMI policy, you’re not really doing it for yourself or your heirs: You are protecting the lender.

If you eventually default, and proceeds from the foreclosure sale aren’t enough to pay off the loan, the mortgage-insurance policy will reimburse the lender for some or all of its losses.

Premiums for mortgage insurance are typically paid into an impound account and factored into your monthly mortgage payment.

Although charges vary, the first-year premium is usually between 1% and 3% of the total amount that you borrow.

Most lenders demand that you purchase a PMI policy if you make a down payment that’s less than 20% of the purchase price of the home.

“Lenders like borrowers who make big down payments because a big down payment decreases the chance that the lender will lose money if it has to foreclose,” said Charles M. Reid, president of mortgage-insurance giant United Guaranty Residential Insurance Co.

Unfortunately, if you’re making a down payment of less than 20%, there isn’t much you can do to avoid buying private mortgage insurance because most lenders will require it.

Although a handful of lenders don’t insist that you purchase a policy, they usually charge a higher interest rate on their loans in exchange.

Paying for a private mortgage-insurance policy might seem like it’s a waste of money. But Reid points out that without PMI, many borrowers who don’t have a minimum 20% down payment wouldn’t be able to purchase a home.

“PMI is a tool that lets a lot of people buy their first house,” Reid said. “If PMI didn’t exist, an awful lot of people would be locked out of the housing market because they wouldn’t be able to get a loan.”

Importantly, though, you don’t have to keep your PMI policy forever. Once you’ve obtained a minimum 20% equity stake in the home--either because prices have risen or you’ve paid the loan down--many lenders will let you cancel your policy.

Although the cancellation process varies from lender to lender, here’s how it usually works:

--You, the borrower, must contact the lender and request that the insurance be canceled. A phone call might work, but it’s best to do it in writing.

--An appraisal of your home’s value is made. The lender may require that you use one of its approved appraisers, and you’ll have to pay the fee. A few lenders simply require a written estimate of the home’s value by one or two local realtors, a service that many sales agents provide for free.

--Once it’s confirmed that you have a 20% equity stake, the lender can cancel your monthly insurance premium. Be patient: It may take several weeks before you notice a reduction in your monthly mortgage statement.

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

AVERAGE RATES FOR RESIDENTIAL MORTGAGES

Average rates for residential mortgages as of July 13, 1990.

Survey Conventional Mortgages Adjustable Mortgages Area 15 Year 30 Year Composite 1 Year Composite National 9.91% 10.16% 10.05% 8.37% 8.65% California 10.15 10.39 10.28 8.49 8.49 Connecticut 10.00 10.22 10.13 8.48 8.68 Wash. D.C. 9.79 10.07 9.94 8.06 8.37 Florida 9.94 10.21 10.08 8.34 8.44 Mass. 9.92 10.21 10.07 8.63 8.91 New Jersey 9.87 10.14 10.02 8.23 8.68 N.Y. Metro 9.97 10.23 10.12 8.41 8.74 New York 10.07 10.31 10.21 8.53 8.81 N.Y. Co-ops 10.36 10.46 10.45 8.61 8.90 Pa. 9.65 9.96 9.82 8.03 8.16 Texas 9.64 9.90 9.79 8.43 8.54

SOURCE: HSH Associates, Butler, N.J.