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<top post>
I only skimmed your post, and could easily have missed this point, but I am
going to give it anyway.
A huge, that's H-U-G-E, reason to go with a piggy back as opposed to paying
the PMI is that the piggyback loan is tax deductible whereas the PMI isn't.
The piggyback note offers two advantages, the payment on the 80% 1st + 20%
2nd is smaller than the 100% payment + PMI, additionally the payment on the
2nd is tax deductible where the payment on the PMI isn't. The borrower can
save in the range of $150 per month (depending on the loan amount and
interest rate) and get a home mortgage tax deduction at the end of the year.
You suggest that the PMI can be cancelled when the LTV goes below 80%. But
this requires the borrower to get an appraisal to support his contention
that the value has gone up -- since the odds are good that it will take a
very long time to pay down 20% of the loan. A combo loan (piggy back loan)
can also be retired in the same way -- the borrower can refi the loan to a
single note when the LTV goes below 80%. The mechanism is nearly identical
to cancel PMI or pay off a 2nd. Given the tax advantage of the 2nd, I would take
the added cost of a refi when the LTV becomes favorable.
You point out that closing costs for two loans is higher than for one. While
this is true, it is very possible to find a 1st and 2nd with the same
lender. When this happens, the 2nd is often closed for a flat fee, like $100
or something in that range. Yes, there can be added escrow costs or broker
processing fees, but these range to a couple hundred dollars, and the
benefits of the combo loan vs. the PMI outweigh the initial costs.
</top post>
"M.D." <delanuel@bellsouth.net> wrote in message
news:Sp19g.42038$Kn4.7502@bignews2.bellsouth.net...
> 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)
>
>
>
>
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Re: Newbie Guide of The Day: Piggyback loan VS. PMI
