Mortgage insurance tries to shake piggybacks
By Holden Lewis • Bankrate.com

You can get lower monthly payments in some cases by getting a home loan with mortgage insurance rather than a piggyback loan. Don't assume that your loan officer or mortgage broker knows this.

"Our message to consumers is look at all the options," says Sal Miosi, vice president of marketing for mortgage insurer MGIC. "In many cases, it's a more compelling offer."

Mortgage insurance has become competitive with piggyback loans because of two developments. First, short-term interest rates rose during the Federal Reserve's two-year rate-hike campaign. That raised rates on the home equity loans and lines of credit that piggyback mortgages use. Second, mortgage insurance companies started pushing single-premium policies that could be financed as part of the loan.

The smaller your down payment on a house, the more likely you are to default on the mortgage and, thereby, cost the lender money and strife. The loan is considered quite risky if the down payment is less than 20 percent. One solution is mortgage insurance.

You pay, lender benefits
The borrower pays for mortgage insurance, but the lender is the beneficiary. Mortgage insurance reimburses the holder of the loan for foreclosure-related expenses such as missed payments, attorney fees and house repairs. The government offers mortgage insurance through the Department of Veterans Affairs and the Federal Housing Administration, and private companies provide the bulk of policies. This article addresses private mortgage insurance.

The cost of mortgage insurance varies depending on the size of the down payment and the borrower's credit history. It can be expensive, so the mortgage industry devised a way around it: piggyback loans. With a piggyback, the borrower splits the home loan in two: a primary mortgage for 80 percent, and then a home equity loan or credit line for 20 percent minus the down payment. Structuring a loan this way eliminates the requirement for mortgage insurance.

Piggybacks are described with three numbers that add up to 100. Each number is a percentage, starting with the primary mortgage, followed by the size of the equity loan and ending with the size of the down payment. If you made a 5 percent down payment, you would get a mortgage for 80 percent of the price, borrow 15 percent as an equity loan or credit line and pay 5 percent cash. That would be called an 80-15-5 piggyback.

Two or three years ago, when you could get a home equity line of credit at 4 percent or 5 percent, piggybacks were almost always cheaper. But now the average line of credit sports a rate north of 8 percent, and the average home equity loan is a shade under 8 percent. And rates on credit lines and equity loans usually run a little higher on piggybacks. Bottom line: Piggyback loans have higher monthly payments than they used to have, while mortgage insurance costs the same.