Don't have 20% down? Consider that old standby -- PMI
WASHINGTON — Sellers are throwing all sorts of goodies at would-be buyers in an effort to bring them back into the marketplace -- free upgrades, vacations, even cars. But when all is said and done, it still comes down to whether the prospect has enough money to close and can afford the monthly payments.
In recent years, many cash-strapped buyers opted for piggyback loans -- a package of mortgages that includes a first lien at 80% of the property's selling price and a second lien for some portion of the remaining 20%, depending on how much money they could put in the deal.
At the same time, buyers who had trouble rubbing enough nickels and dimes together to make the house payment every month went with adjustable mortgages or interest-only loans. Adjustables entice borrowers with the lowest possible interest and principal payments, and the monthly cost of an interest-only loan is even lower because the chunk of change that goes to principal is omitted, at least for a while.
Now, though, with rising mortgage rates and slower appreciation, these options don't look as good as they once did.
Enter loans with private mortgage insurance. Make that re-enter, because the insurance was a staple of the mortgage market long before these other loans were invented. Indeed, loans with private insurance have allowed millions of folks to become homeowners, people whom lenders would otherwise consider high-risk borrowers.
Private mortgage insurance protects lenders against default by home buyers who don't have at least a 20% down payment. History has shown that borrowers who don't have at least that much are more risky, so the insurance, in effect, makes up the difference between what lenders need to feel safe and what borrowers have.
If a buyer has only enough cash for a 10% down payment, for example, the insurer will cover the lender against the loss of the missing 10% if the buyer fails to make his payments as promised. If the borrower can make only a 5% down payment, the insurer will cover the remaining 15%.
The drawback is that the insurance isn't cheap. And so the mortgage business came up with piggyback loans as an alternative.
The total out-of-pocket cost can be lower for piggybacks, or it can be greater, depending on the rate charged on the second mortgage. But because interest on a loan backed by a personal residence is tax-deductible -- and mortgage insurance is not, at least not yet -- the after-tax cost of piggybacks is usually less than loans with private mortgage insurance.
