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Mortgages & Refinancing

Why Can't I Dump My PMI?

In figuring your equity in your home, the lender doesn't have to count appreciation.

I have been waiting for the day when I would have 20% equity in my home and would be able to cancel my private mortgage insurance. Now that day has come (I actually have 22% equity). But when I called Chase (my lender), I was told that I needed to get a Broker Price Opinion, which costs $150, before they would do anything. Can they do that? -- Chris Barenz, Blandinsville, Ill.

Call it a Catch-22%. Lenders are generally required to drop private mortgage insurance when your equity in your home reaches 22% of the property's value. If you ask, they'll sometimes do it once your equity reaches 20%.

But in figuring your equity, the lender is obliged to consider only your down payment plus the principal portion of your monthly payments. The lender doesn't have to count price appreciation. Chase, for one, drops PMI automatically only if you reach the 22% equity level through scheduled monthly payments (extra payments don't count) and don't have any missed or late payments.

We asked Chase to look into your case, and the company pointed out that you reached 22% equity by making accelerated payments. In that case, the bank requires borrowers to pay for a Broker Price Opinion, which costs about half as much as a full appraisal. "Generally, this is to confirm that the outstanding loan is no more than 78% to 80% of the home's value, " says Tom Kelly, of Chase. But $150 is probably a small price to pay compared with your PMI premiums.

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All aboard for rails

I read that Warren Buffett's Berkshire Hathaway bought almost 11% of the shares of Burlington Northern Santa Fe. Is it too late to invest in the stock? -- Tom Stewart, via e-mail

We remain bullish on all the railroad stocks because the industry is undergoing fundamental change. With retail goods increasingly coming from Asia, supply lines from factory to store shelf are longer. And that plays to rail's strength.

Demand for coal, another rail staple, is increasing, and the low-sulfur variety from Wyoming sometimes travels more than 1,000 miles. High fuel costs and driver shortages mean more truckers put their trailers on trains.

All of these trends give railroads pricing power they've lacked for a century. Railroads are still raising rates in a weak economic environment. A stepped-up economy will give earnings an even bigger boost. Plus, analysts expect railroads to step up their repurchases of shares, which would increase earnings per share.

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BNSF (symbol BNI; recent price $91), Norfolk Southern (NSC; $54) and Canadian National (CNI; $48) are generally considered the best-run of the larger North American railroads.

Don't worry about Subprime woes

I have my mortgage with New Century, which has filed for bankruptcy. How does this affect me? How concerned should people be about the financial soundness of their mortgage company? Might my interest rate rise? -- Robyn Healey, via e-mail

New Century's bankruptcy filing may affect you a lot less than you expect. The terms of your mortgage are set by contract and can't be changed no matter what happens to your mortgage company, says Chuck Cross, of the Conference of State Bank Supervisors. That also applies to adjustable-rate loans. "Every adjustment is preprogrammed, so people don't have to be concerned, " says Cross.

It's also likely that New Century has sold your loan to another company or will do so in the near future. Mortgage originators, whether financially healthy or not, typically sell their loans to other investors. In that case, you may end up sending your check to someone else. Just make sure you continue making your payments so that you don't default on the loan.

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Borrowers who recently applied for a loan through New Century will need to find a new lender. And that may not be easy for people with poor credit who have to depend on subprime lenders. Those companies may either beef up their standards or go out of business.

His and her benefits

Both my spouse and I have been paying Social Security taxes for more than 35 years. Now I've been told by a family member that my husband and I can't both receive benefits based on our own records. So if my husband retires and takes Social Security, I will only be able to get spousal benefits on his record, not my own. Is that true? -- Lea Ellwood-Filkins, Wyandotte, Mich.

I hope this doesn't start a family feud, but you've been misinformed. If you retire at your full retirement age -- age 65 to 67, depending on the year you were born -- you can collect either the full benefit that you qualify for on your own or half of your spouse's benefit, whichever is higher.

It's true that you can take spousal benefits only after the retired worker begins receiving benefits on his record. But if you're older than your husband, you can start by taking a check based on your own record -- even if your payment would be less than 50% of your husband's -- and then increase your benefit to the spousal amount once he starts claiming Social Security.

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You have to be at least 62 to start receiving spousal benefits, but, just like any retiree, you will receive a reduced benefit if you begin taking Social Security at that age. To estimate how much you would receive based on your own earnings history versus the spousal option, use the calculators at www.socialsecurity.gov.

Rules for 529 plans

We have three daughters, ages 15, 13 and 11, and have accumulated about $35,000 in state-sponsored 529 college-savings plans for each of them. They are all doing very well in school. What happens to our college savings if they receive full-tuition scholarships? Can we use the funds to pay for room and board? What if they don't live in the dorms? -- George and Ann Robichaux, Houma, La.

If one of your children is fortunate enough to win a scholarship, you'll be eligible to take a penalty-free withdrawal from her 529 account up to the amount of the award. You would, however, have to pay federal and state income taxes on the earnings portion of the withdrawal. To avoid those taxes, you could name another family member as beneficiary of the plan.

Not to worry, though. Even if your child gets a full-tuition scholarship, you'll probably still have plenty of other bills that qualify for tax-free withdrawals from her 529 plan -- including required fees, books, supplies and equipment. As long as your daughter attends school at least half-time, room and board count, too. And if she lives off-campus, you can take a qualified withdrawal up to the cost of on-campus housing, says Doug Chittenden, head of education savings for TIAA-CREF, which administers many 529 plans (see IRS Publication 970, Tax Benefits for Education).