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.
When choosing between piggybacks and mortgage insurance, ask the lender to show you the monthly payments, equity buildup and after-tax cost for each. Then consider the following:
? Do you want to build equity fast? Take the piggyback loan and pay off the second mortgage on an accelerated schedule, says G. Richard Bright, a senior vice president at Countrywide Home Loans.
? Does the piggybacked second mortgage carry a balloon payment a large lump-sum payment due in a certain number of years? That's OK if you'll sell or refinance the house earlier. Balloons lower your monthly cost.
If you're still holding the balloon at the end of the term, however, you may have to refinance it at a higher interest rate. Piggyback loans come with and without balloons.
? Do you want revolving credit? At some banks, your piggyback loan comes in the form of a home-equity line of credit. This lets you repay part of the mortgage and then borrow the money back. You can also add a home-equity line to a loan with PMI, as soon as you have enough equity to qualify. If you don't care about this kind of credit, a regular piggyback loan is fine. If you need more money, a lender might refinance your second mortgage and let you take cash out of the house.
? Does the second mortgage or home-equity line carry an adjustable rate? Your monthly payments might go up.
? If you choose mortgage insurance, can you cancel the coverage once the equity in your home reaches 20 percent? Usually yes but not if the lender buys the insurance for you. In that case, it's non-cancellable unless you refinance. When you cancel PMI, you'll probably have to pay $250 to $300 for a bank appraisal, so figure that into mortgage insurance's total cost.
? Are you cash-poor? With mortgage insurance programs, you can put down as little as 3 percent. Piggybacks normally require at least 10 percent. Previously, piggybacks were often cheaper than mortgage insurance. But now, the new single-premium PMI is also looking good. Ask a mortgage lender about them both.
Retirement planning by computer
Anyone with a 401(k) retirement plan can't help but worry about it. Most plans put your future into your hands. You have to choose your own investments from a list the plan provides.
But how do you choose? Some employers distribute booklets explaining general investment principles. In the end, however, you throw darts. You know little or nothing about the level of risk your investments represent. Some of you will retire with half the income that you could have had, if you'd made better choices in your 401(k).
Don't get me wrong; I'm all for investment education. But it's not going to turn the average employee into a fund-picking superstar. To get the most from your money, you need specific, personal advice. Ideally, it will be based on the same scientific systems of analysis used by the managers of major pension funds.
In the past, you could only dream of getting that level of professional help. But the 401(k) world is on the verge of change.
A few top firms are developing personal advisory services, which employers can make available to employees. At first, this help will be offered only by major companies, but eventually it will filter down to smaller ones (at present, it's not available for individual purchase.)
The advice will come from a smart computer that's programmed with information about the investments available in your 401(k). The program tells you which of your plan's investments will give you the best return, consistent with your retirement goal and the risk you can afford. You're also told how much money to invest in each.
The best-in-show for this new 401(k) advisory business in fact, the finest tool I've ever seen prepared for individual use comes from Financial Engines Inc. in Palo Alto. One big thing makes it special: It shows you the odds that the mix of investments you have chosen will actually reach your retirement goal.
Syndicated columnist Jane Bryant Quinn can be reached in care of the Washington Post Writers Group, 1150 15th St., Washington D.C. 20071-9200.
For reprint and licensing requests for this article, CLICK HERE.