Home Mortgage Insurance - Piggyback Loans Putting Mortgage Insurers in the Trough

The policy protects the lender against default, while the borrower pays the mortgage insurance premium. The policy is required until the mortgage is paid down to seventy eight percent of the home's appraised value.

Home mortgage insurance can be expensive: as high as $1,500 per year on a $200,000 home. Divide that by twelve and you have the addition to your monthly mortgage insurance premium. In order to get around PMI, lenders have been offering dual loan packages with a mortgage of eighty percent of the purchase price and a second loan, called a piggyback loan that covers whatever portion of the 20% down payment that the borrower cannot meet. Thus an 80-15-5 loan package is an eighty percent mortgage, a fifteen percent piggyback loan and a five percent down payment.

While the additional loan will be at a higher rate than the mortgage, the interest on that loan is deductible whereas the premium on mortgage insurance is not. As a result, it is often cheaper to opt for the piggyback loan than mortgage insurance. According to one estimate, forty percent of all home purchases with down payments of less than twenty percent now opt to avoid home mortgage insurance.

Even though the borrower is paying closing costs on two loans, avoiding home mortgage insurance is still a better deal in the short run. Whether or not it's a better deal in the long run depends on several variables. If the buyer is going to be in the home for a long period of time, he may be better off with the larger mortgage at a fixed rate and paying the mortgage insurance premium until he has sufficient equity. Eventually, the cost of the insurance premium will cancel out.

That process could take several years however, and if a buyer is not going to be in the house for an extended period the choice of dual loans and dual interest deductions may be a better bet - particularly if the principal mortgage is an ARM. Home mortgage insurance companies have responded by hurling insults at all things "piggyback" and by introducing products such as mortgage insurance premiums that are folded into the loan interest rate by raising it a quarter point or some similar amount.

With this design the lender pays the mortgage insurance premium. Because it's folded into the mortgage premium, the policy premium may be deductible as interest. The policy can't be cancelled in this model, however; in order to remove it from the mortgage you have to refinance. Home mortgage insurance companies have been lobbying Congress aggressively to provide deductible status for their product.

All About Home Mortgage Insurance

The first type is mortgage life insurance and the second is private mortgage insurance. Mortgage life insurance is a voluntary program that is generally purchased by people as a hedge against disability or death, to insure that their dependents can maintain the home. Private mortgage insurance is often made mandatory by lenders as part of a mortgage contract. Here are a few things to help you consider which you need or if you will be required to purchase private mortgage insurance when you buy your home.

Private Mortgage Insurance

A borrower purchases private mortgage insurance to compensate for a low or non-existent down payment on a home. This helps assure against a quick foreclosure situation, which can cost the lender a lot of money. This insurance will cover the cost of closing and ongoing monthly payments. Occasionally a lender will provide the insurance as part of a deal, but more often than not the cost will be placed solely on the borrower.

The biggest home lenders, Freddie Mac and Fannie Mae, have established new guidelines when it comes to insurance, as a result of their near collapse. These days a down payment of up to 25% will no longer bring borrowers a lower interest rate. In light of recent experiences, these lenders now consider such borrowers just as risky as those who provide a lower down payment and take out mortgage insurance.

Currently, once a home's loan to value equals out, borrowers are entitled by law to cancel their mortgage insurance. That is when the amount of the outstanding loan falls below 80% of the home's appraised value. New borrowers will likely not be allowed to cancel the insurance until the loan to value falls to 50%.

Mortgage Life Insurance

Mortgage life insurance is purchased to insure that a home is paid off in the event that the borrower dies or can no longer work. This is often done to assure that survivors can keep the property without being burdened by mortgage payments. Whether or not this type of insurance makes sense in your particular case depends on factors such as age, dependents health risks and the amount owed on the home. Many people find that it's more economical to purchase a conventional life insurance policy, part of which can be used to pay off the outstanding debt on the home. This type of payment allows the dependents to receive a lump sum payment that can be invested and earn money while the mortgage continues to be paid. If a homebuyer is unable to qualify for a traditional life insurance policy due to ill health, then a mortgage policy might be the only option. There are usually fewer health related restrictions on such policies, making them accessible to a greater number of people.