|
PMI industry fights back against piggyback loans
By Holden Lewis . Bankrate.com
The mortgage insurance industry wants to get the piggy off its
back.
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 insurance
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 $200,000 $225,000
Principal and interest on primary mortgage $1,136 (5.5
percent rate) $1,278 (5.5 percent rate)
Amount of piggyback mortgage $25,000 $0
Principal and interest on piggyback $164 (6.875 percent
rate) $0
Mortgage insurance premium $0 $97.50
Total cost per month $1,300 $1,375.50
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 is not 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.
The private mortgage insurance industry is responding to the
challenge of piggyback mortgages with more than just a plea for borrowers to
compare the numbers. One riposte is subtle: Mortgage insurance people avoid
using the word "piggyback," possibly because the word carries carefree
connotations of a gay childhood. Instead, they call piggybacks "MI
avoidance" or "split-structure" loans.
PMI industry pitches alternatives
MGIC, the largest mortgage insurance company, portrays the
piggyback loan as a mean, snorting pig in the company's marketing materials
for SingleFile, a product designed to kick piggybacks in the snout.
SingleFile's Web site sports a humorous parody of a political ad in which
piggyback loans are accused of voting against Christmas. (The intended
audience is mortgage lenders and brokers, not consumers.)
With SingleFile, the borrower doesn't pay a monthly mortgage
insurance premium. Instead, the lender charges a higher interest rate -- a
quarter-point to a half-point higher -- and the lender pays for mortgage
insurance. MGIC offers a comparison calculator. SingleFile is less expensive
than other types of mortgage insurance, because it is offered only to
low-risk borrowers who have excellent credit. The main drawback is that you
cannot cancel it by getting the house reappraised. To get rid of SingleFile,
you have to refinance the mortgage.
It's a good deal for people who can qualify, says Patrick Sinks,
executive vice president of field operations for MGIC.
"The borrower only needs to have one loan rather than two
loans," Sinks says. "He has only one payment, has lower closing costs. By
virtue of the fact that the lender has him pay it as an interest rate, that
interest is tax deductible."
PMI industry seeks tax break
Tax-deductibility is an important issue with the industry.
Mortgage insurers tried but failed last year to persuade Congress to make
mortgage insurance tax deductible for families earning up to $100,000. "It
would level the playing field," Lubar says, because interest paid on
piggyback mortgages is deductible.
The industry is trying again this year, with a bill introduced
in January by Sen. Gordon Smith, R-Ore. MICA estimates that about 12 million
homeowners would save an average of $200 annually on their taxes if the bill
becomes law, a reduction of $2.4 billion in tax revenue. Smith told his
Senate colleagues that the law would make homeownership affordable for
300,000 families a year.
Even if the deductibility bill is shot down again, the mortgage
insurance industry will continue to swing a machete against piggyback loans.
"Piggybacks hog your equity," MICA's Lubar says, meaning two things: You
build equity slower with piggyback loans, and a piggyback prevents you from
getting a home equity loan or line of credit to pay for home improvements or
consolidate debts.
Lubar notes that many piggyback second mortgages have variable
rates -- and they're likely to go up over the next few years. And he points
out that you have to pay closing costs if you eventually refinance the first
mortgage to get rid of the second, piggyback, loan.
Because borrowers, too, eventually want to get the piggy off
their backs.
(Source: By Holden Lewis . Bankrate.com -
http://www.bankrate.com/brm/news/mortgages/20050303a1.asp)
|
|
Newbie Guide of The Day: Piggyback loan VS. PMI
