Private mortgage insurance counters bad image with cheaper options
By Michael D. Larson • Bankrate.com

It's no wonder that some consumers look at the private mortgage insurance industry the way Ronald Reagan viewed the Soviet Union, given the beating PMI has taken the past couple years.

But this "evil empire," like Darth Vader's, has decided to strike back. PMI companies, fed up with customers defecting to "80-10-10" loans and other similar products, have rolled out partially refundable premiums and lower insurance rates, as well as revamped plans that allow borrowers to pay premiums in lump sums rather than month by month. The moves should help consumers who can't come up with 20 percent down find better deals today than they might have just a few years ago.

"We give the ultimate security to our lenders as customers, as well as simplicity to our consumers," says Laura Hunt, vice president or marketing for United Guaranty. The Greensboro, N.C.-based PMI company is a subsidiary of American International Group Inc.

"We have tweaked them even more to make them more competitive because we're very aware of alternative financing programs that lure the consumer with the idea that they don't have to pay mortgage insurance," she adds. "Our goal is to always provide the best price, the most security and the simplest execution."

PMI protects lenders, not borrowers
Private mortgage insurance has been around for decades, helping consumers who can't come up with a 20 percent down payment get into homes. While many borrowers have benefited from having that option, they aren't particularly fond of the way the coverage works. In case of default, it protects lenders rather than them, for one, yet they have to foot the premium bill. That frequently adds an extra $20, $40 or as much as $100 a month to their payments.

What really got people steamed for the longest time, however, was the fact they had such a hard time getting rid of PMI once they no longer needed it. After paying the mortgage principal balance down to 80 percent of the home's value, consumers found that policies governing who could get rid of PMI and how varied widely from lender to lender. Some completely forgot they had PMI at all and, conveniently, neither the lenders collecting their payments nor the companies underwriting their insurance policies reminded them they were paying money needlessly.

All of these problems helped fuel the popularity of PMI alternatives, such as the 80-10-10, or "piggyback," loans. Under these plans, borrowers put 10 percent down, take out a first mortgage for 80 percent of the purchase price and a second mortgage for the remaining 10 percent. Although that second mortgage carries a higher interest rate, it allows borrowers to avoid PMI

Congress to the rescue
The troubles with PMI also prompted Congress to react by passing the Homeowners Protection Act of 1998, which took effect July 1999. The law includes several provisions aimed at educating borrowers more thoroughly about PMI and allowing them to cancel it with less hassle.

Amid the shuffle, though, the PMI industry's response has gone largely unnoticed. Some experts say that's unfortunate for consumers, because companies are introducing plan changes and new products that have the potential to lower borrower financing bills.

The PMI Group Inc., for example, revamped its "Super Single" policy as a result of the new law governing insurance cancellation. The policy allows borrowers to finance their premiums into their loans rather than pay them month to month, and it now costs anywhere from 2 percent to 21 percent less than before, depending on the characteristics of the insured mortgage.

"We took a look at all of our rates ... and restructured them to give consumers the best advantage," says Taia Lockhart, director of product development and market intelligence at the San Francisco-based company. "We came up with across-the-board reductions."

Competitor United Guaranty made changes, too. Borrowers who get the company's Quality FinanceAble insurance now get 20 percent of their PMI premiums back after making 30 monthly payments, as long as none of them is 30 days or more late. The company also recently rolled out a 103 percent financing program that allows consumers to finance their entire home purchase, including most closing costs.

"The more flexibility and variety that we as a mortgage insurer show, the more opportunities that we have," says Hunt. "We're trying education and even greater versatility in products."

Ask lender about insurance offers
Though consumers don't interact directly with PMI companies, they can ask their lenders if they have any special insurance offers available. Most lenders deal with multiple insurers, too, so they should be able to track down what a borrower needs, especially if there's a specific coverage type mentioned.

"It's difficult to necessarily offer every product and every option that's out there," says Robert Bakerian, vice president of secondary marketing at Flanders, N.J.-based American Federal Mortgage Corp.

"But a consumer could surely ask or mention about a product that they've seen and suggest something, and I would think the average mortgage company, if it was brought to their attention by the consumer, then could reach out and contact the MI company."

Cost difference usually small
Regardless of which option they choose, consumers need to be aware that the difference in total costs between 80-10-10 loans and PMI-protected ones is often very small. It can also vary depending on a multitude of factors, so people should be sure they get a side-by-side comparison of their options from their lenders before making any decisions.

For instance, numbers ran the week of April 20 showed that a borrower would pay over $40 less a month by getting two loans through an 80-10-10 plan than one with PMI. But because the 10 percent second mortgage takes longer to be paid off, the overall interest cost of doing so would be more than $6,000 greater. On the other hand, the two-loan customer could take the monthly savings and plow it into the second "10" mortgage. That would reduce the loan term and interest cost, thereby making it the more cost-effective choice.

With some of the new programs, things get even more complicated. Financing the PMI premium into the loan balance under one of the plans mentioned, for example, allows part of it to be considered tax-deductible. That's because people are no longer paying just $50 a month in nondeductible charges; instead, they're adding $2,500 or $3,000 to their mortgage balances, a portion of which they'll recoup because the interest on that increased balance is deductible.

Though these details can be mind boggling, experts say consumers shouldn't worry too much because the overarching trend in PMI remains in their favor. With companies eager for business as mortgage volume declines -- and customers wary of the insurance they can get -- the industry should have plenty of incentive to make even better deals as time goes on.

"The MI companies probably will get more aggressive with it," Bakerian says. "They're starting to go in a direction of saying, 'With automated underwriting, if you have a good strong loan; good, strong credit standing, we'll reduce the costs of the MI.' "