Mortgage Insurance Back in Vogue

If you have less than a 20% downpayment to put on a loan, mortgage loan officers have been quick to suggest the 2-loan approach: An 80% loan at standard rates and a piggyback loan for the remaining amount. The second loan is usually a home equity loan, but with today’s rising rates, can easily reach 9-12%, depending upon your credit score and how much additional downpayment you provide.

Many loan officers are now suggesting an old solution – Mortgage Insurance – and putting their clients in one loan for the full amount instead of 2. The monthly insurance premium isn’t interest and isn’t principle. Instead it is true insurance, protecting the bank from a possible loan default.

Here’s an example of how mortgage insurance may compare on a $200,000 loan with buyer putting down 10%:

First loan for 80% at 6.8% and second loan at 9.9%: $1217 per month

One loan for 90% plus mortgage insurance: $1198 per month

The difference in cost is not substantial here, but mortgage insurance has 2 advantages: the first is that you are protected from interest rate increases, and the second is that you can eventually eliminate the mortgage insurance once your loan reaches 80% of the homes value with appreciation (check with your loan officer for the details on removing mortgage insurance).

If you can work at paying down your second loan quickly, a piggyback loan may still be the best choice. Having access to a home equity loan for emergencies helps many homeowners to sleep better at night. However, with many of us stretching to afford bigger and more expensive homes, make sure your intentions line up with reality.