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

Because home prices have made twenty percent down payments impossible for legions of first time home buyers, a dual-loan concept has evolved for home financing that has made home mortgage insurance companies very unhappy. Also known as private mortgage insurance (PMI), this policy is required of every home buyer who is taking out a mortgage of more than eighty percent of the home purchase price. 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 homes 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 its 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 its folded into the mortgage premium, the policy premium may be deductible as interest. The policy cant 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.

G. Mundy is a freelance writer specializing in mortgages and finance. For more information, please visit Mortgage Lenders Plus.com

Home Owner Insurance Quote - What You Need To Know
Home owner insurance is the way of keeping your home free from anything that might be dangerous for your home. Obtaining a free home owner insurance quote is an essential first step prior to finding the proper insurance consultant, insurance company, and even a cheap insurance rate that still meets all of your home insurance needs. The best home o...

Home Owners Insurance Tax Deduction up to $500
Before Congress went on recess for the holidays, it passed a new tax break for middle-income taxpayers who plan to purchase a home in 2007. The tax break, neatly sandwiched in an omnibus tax bill, allow new homeowners to claim a deduction on their mortgage insurance premiums.Many home buyers cannot afford to make an initial down-payment of 20% of t...

Mortgage Payment Insurance Can Protect Your Home From Repossession
If you should find yourself unable to work and lose your income then finding the money needed each month to continue making your mortgage repayments could be a struggle. In the worst case scenario the situation could lead to you getting behind on your loan and ultimately losing the roof over your head. Mortgage payment insurance can protect your ho...

Tips to Pay Off Debts
Most Americans have incurred debt in one form or another. From mortgages to credit cards to home equity loans, debt often piles up faster than it can be paid off. However, with the help of a few strategic and effective tips, you can get your debt paid off sooner than you think and be free of such restrictive financial constraints. Tackle your cr...

Is the Money Merge Account for You?
I heavily researched the money merge account program to determine if it is wise for me and my husband to pay off our mortgage sooner using it. There are so many varied opinions about mortgages involving payoff plans, tax advantages, and investments that it can be difficult to know who to trust and what is right for our situation.If you dont know wh...

Home Insurance - Buildings Cover
If you are purchasing a home, then buildings cover is something that your mortgage provider will insist on. This is because it insures the permanent structure of a home, and essentially until you fully pay off your mortgage, "your" house is their investment too.It's important to note that although your mortgage provider may offer you certain reduce...

Warning! More Americans Are Falling Behind On Their Debts
It seems that more and more Americans are falling behind on their debt. This is not just mortgages and subprime borrowers. People are falling behind on credit cards, car loans and overdraft lines of credit. And things do not look like they are going to get better any time soon.So what is the underlying cause of this increasing delinquency on all di...