Insuring can beat combo home loans

Saturday, September 2, 2006

Did you know 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.

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-increase 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.

The borrower pays for mortgage insurance, but the lender is the beneficiary. Mortgage insurance reimburses the lender for foreclosure-related expenses such as missed payments, attorney fees and house repairs.

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 piggyback loans. The borrower splits the home loan in two: a primary mortgage for 80 percent, and 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. An 80-15-5 piggyback is one where you get a mortgage for 80 percent of the price, borrow 15 percent as an equity loan or credit line, and make a 5 percent down payment.

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 those rates have doubled or nearly so. Piggyback loans have higher monthly payments than they used to have, while mortgage insurance costs the same.

Don't count on your mortgage professional to be aware of this. Bankrate asked a mortgage broker and a loan officer to compare 80-10-10 piggybacks with loans for 90 percent of the home's value with mortgage insurance. In the scenarios they provided, the piggybacks had lower monthly payments. But lenders considered only one type of mortgage insurance: the kind with monthly premiums. Two other types of mortgage insurance finance the premium upfront, often yielding lower monthly payments.

Source

http://seattlepi.nwsource.com/money/283584_real02.html