By JANE BRYANT QUINN
If you're buying or refinancing a house, and putting less than 20 percent down, the bank requires you to buy mortgage insurance. This guarantees that the lender won't take a major loss if you default.
But banks are getting more aggressive. They'd like to lay hands on the money you're paying to the insurer.
So in place of mortgage insurance, many are offering something called a piggyback loan: You pay a higher interest rate on a small part of the money you borrow, and that higher rate helps offset the bank's losses from defaults.
Which approach is best? Here's where the competitive swordplay starts.
The Mortgage Insurance Cos. of America (MICA), a Washington-based trade group for private insurers, put out a press release claiming that piggyback loans are much more expensive and dangerous, besides. Don't believe it. MICA is, um, dreaming.
For their part, lenders may show you numbers "proving" the inferiority of mortgage insurance. Sometimes that's true but sometimes not.
Borrowers get a big first mortgage, at standard interest rates, but have to insure it. You carry private mortgage insurance until you have at least 20 percent equity in your home.
After that, you can normally cancel your coverage if you meet certain conditions. For example, the property can't be declining in price.
Typically, the insurer charges a fixed percentage of the loan's declining balance for the first 10 years, then a smaller percentage for the remaining years. There may or may not be a payment up front. Sometimes the lender buys the insurance for you; in return, you pay a slightly higher (but tax-deductible) interest rate.
The newest payment method known as "financed single premium insurance" was introduced to compete with piggyback loans, says Geoff Cooper of MGIC in Milwaukee, the nation's largest mortgage insurer.
Here, you pay for the coverage yourself but you pay only once for the life of the loan. The borrower lends you the money and adds it to your mortgage amount. If you cancel the PMI before about 14 years are up, you'll get a refund for the amount of premium you haven't used.
With piggyback loans, you put at least 10 percent down, take an 80 percent first mortgage at a standard interest rate, then a second, "piggyback" mortgage for the remaining amount. For the second mortgage, you pay anywhere from 1.5 percentage points to around 6 points more, depending on your creditworthiness.
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