PMI industry fights back against piggyback loans
The mortgage insurance industry wants to get the piggy off
Two-tiered home loans called piggyback mortgages are stealing
the bacon from mortgage insurance companies. By one estimate,
piggybacks have taken 40 percent of the market share from
mortgage insurers, whose product is referred to as private
mortgage insurance or PMI. Mortgage insurers are fighting
back in multiple ways: by pushing to make the insurance tax-deductible,
by developing a new product and by urging home buyers to compare.
Piggybacks and mortgage insurance are two common ways of
getting a home loan with a down payment of less than 20 percent.
When a buyer borrows more than 80 percent of the home's value,
lenders deem that loan riskier. Some lenders cushion themselves
from that risk with mortgage insurance, which reimburses the
lender for costs associated with foreclosure. The lender is
the beneficiary of a mortgage insurance policy, and the borrower
pays the premiums.
A handful of companies offer private mortgage insurance, which
usually is paid monthly as part of the regular mortgage payment.
The Federal Housing Administration, Veterans Administration
and the Rural Housing Service offer government mortgage insurance
that involves an upfront payment at the beginning of the loan,
plus monthly payments.
A few years ago, lenders began marketing piggyback mortgages
aggressively. A piggyback loan works this way: You get two
home loans -- a primary mortgage for 80 percent of the purchase
price, and a higher-rate secondary mortgage (the piggyback
loan) for the rest of the borrowed amount. Piggybacks appeal
to homeowners because the combined monthly payments usually
add up to less than the monthly payments on a single loan
with mortgage insurance.
|Comparing piggyback loans and mortgage
|There are myriad ways to structure a piggyback loan. One Georgia
mortgage broker provides this comparison for a hypothetical home buyer who
has good credit and makes a 10 percent down payment on a $250,000 home.
||Mortgage plus additional piggyback loan
||Mortgage plus private mortgage insurance (PMI)
|Amount of primary mortgage
|Principal and interest on primary mortgage
||$1,136 (5.5 percent rate)
||$1,278 (5.5 percent rate)
|Amount of piggyback mortgage
|Principal and interest on piggyback
||$164 (6.875 percent rate)
|Mortgage insurance premium
|Total cost per month
|The cost is initially lower on a piggyback
loan, but the private mortage insurance can be canceled
once there is sufficient equity. The break-even point
between piggybacks and PMI depends on the speed of home
value appreciation, the homeowner's tax situation (PMI
isn't deductible, interest on piggyback loans is) and
any additional costs or fees associated with each product.
Having to pay closing costs for two loans erases some of
the advantage of piggybacks, but they still tend to be cheaper
in the short run. What about the long run? The answer differs
for each homeowner's situation because it depends on the interest
rates, the pace of home appreciation and the length of time
the borrower plans to own the home. Ask the mortgage lender
or broker to give you a side-by-side comparison, possibly
with the help of a calculator
on the Web site of the Mortgage Insurance Companies of America,
the industry's trade group.
"People who live in the home for the long term, generally
speaking, are going to be better off with a single mortgage,"
says Jeff Lubar, spokesman for MICA. "Remember, the mortgage
insurance is going to be cancelable at some point."
To succeed in canceling mortgage insurance, your outstanding
loan balance has to be 78 percent or less of the home's appraised
value. That requires double-digit appreciation if you make
a down payment of 10 percent or less -- a pace that might
not be realistic over two or three years.
Even if you get mortgage insurance canceled promptly at
the two-year mark, it might take five to 10 years to recoup
the cumulative cost of the mortgage insurance. That's why
a lot of borrowers get piggybacks -- they know they won't
own the house that long.