Back when interest rates had hit rock bottom, consumers would often turn to “piggyback loans” to avoid the extra expense of monthly private mortgage insurance payments. Now that interest rates are up, private mortgage insurance may be making a comeback.
“Because interest rates have gone up, making piggyback loans is less favorable,” said Brian Carey, an economist with Moody’s Economy.com. “Every time the Fed increases interest rates, the interest rates on those loans go up with the prime interest rate. They are becoming more expensive. Right now you are probably looking at 7-3/4 percent interest for a piggyback loan.”
Under a piggyback loan structure, borrowers obtain a second mortgage at purchase, which reduces the first mortgage loan-to-value ratio to 80 percent and eliminates the need for private mortgage insurance. Popularity of such loans soared around 2002 through 2005, when interest rates were low.
There was even some discussion of the possibility that piggybacks might make the personal mortgage industry irrelevant. But now, with interest rates going up, choosing a piggyback isn’t a snap any more.
“The decision as to whether to use a piggyback is more difficult now versus more traditional forms of mortgage insurance,” said Keith Gumbinger, vice president of HSH Associates. “It is more difficult because interest rates on those second trust deeds, whether home equity lines or home equity loans, have risen substantially in recent years.”
Companies that offer mortgage insurance, such as Walnut Creek, Calif.-based The PMI Group, Philadelphia-based Radian Guaranty and Mortgage Guaranty Insurance Corp. (MGIC) of Milwaukee, stand to benefit from this development.
MGIC is hoping to capture consumers with its “SingleFile” product, an alternative to the piggyback loan, according to Sal Miosi, the company’s vice president of marketing.
“SingleFile is a mortgage insurance product that’s deeply discounted for borrowers with better credit profiles. It’s discounted for consumers with a reasonable debt ratio and a high FICO score,” Miosi said.
The product debuted in August 2004 to compete with piggyback loans, but “a lot has happened since then,” Miosi said. “When we first came out with SingleFile, the prime rate was 4 percent. The overall market has shifted a lot and in general all our mortgage insurance products have become more competitive.”
The big difference with the SingleFile product, Miosi said, is that it’s lender-paid, so it’s tax-deductible, unlike other forms of mortgage insurance that are paid by the borrower.
“Borrower-paid insurance is set apart from the interest rate,” Miosi said. “That’s the disadvantage. They (consumers) can’t deduct it from their income taxes.”
On the other hand, the disadvantage of SingleFile is that, unlike borrower-paid insurance, the consumer can’t discontinue the insurance after a couple of years when the house’s value goes up and there’s a better loan-to-value ratio.
“If their (consumers’) goal is to lower their payment today, SingleFile is their best option. If their goal is to be free a few years down the road, they should probably look at borrower-paid mortgage insurance,” Miosi said.
According to a 100 percent financing loan structure comparison provided by MGIC, a borrower would pay $2,065 monthly for two loans, with the second a home equity line of credit, on a $300,000 home loan, if the first loan were $240,000 and the HELOC $60,000.
Using those same parameters, the consumer would make $2,071 monthly payments on that $300,000 loan with two loans, one a fixed-rate second mortgage.
With traditional borrower-paid mortgage insurance, the monthly loan payment would be $2,186 on that $300,000 home loan, and with SingleFile, it would be $2,047.
Since borrower-paid mortgage insurance can be cancelled in two years – generally, once the homeowner has reached 20 percent equity – at that point, when they cancel the mortgage insurance, their new loan payment will be $1,946.
“If you took one step back as a consumer and looked at what’s better for you, mortgage insurance or a piggyback loan, there’s a lot to be considered,” Miosi said. “One is your credit profile. Could you qualify for a second mortgage? Could you qualify for SingleFile? Is it more important for you to make low payments right off the bat, or to be able to cancel your insurance down the road? Everyone has their own appetites.”