As published in Scotsman Guide's Residential Edition, January 2006.
With interest rates at record lows, many loan officers have gained a competitive edge by helping borrowers avoid mortgage insurance (MI). This is commonly done through "piggyback" or "combo" loans, which combine a first and a second mortgage to achieve a high loan to value (LTV) without MI.
In the late 1990s, loan officers who offered the early combo-loan products had a distinct advantage over their competition. Borrowers responded in droves, riding the wave of negative MI sentiment that was common during that time.
In today's market, however, these MI-avoidance products have become so common that they do not distinguish one loan officer from another. And with second-mortgage rates rising, today's piggyback loans can leave borrowers with higher payments than the loans they wanted to avoid.
Like the market, MI is changing. To remain competitive, MI companies have developed products that provide consumers with new options, such as discounted, lender-paid MI (LPMI).
A shifting market
In much of the country, home prices have experienced double-digit appreciation rates, raising the U.S. median home price to more than $200,000. This has effectively pushed the traditional 20-percent down payment even further out of reach of the average borrower.
This explosion in home prices has also created another problem for homebuyers. While saving for a down payment used to be buyers' biggest challenge, historic low interest rates have had little impact on a new challenge -- rising debt-to-income (DTI) ratios. Borrowers are being forced to commit more of their income toward their mortgage payments.
Opportunity is knocking
In recent years, many homebuyers wanted the lowest-possible monthly payment and thus took advantage of aggressively priced adjustable-rate and interest-only loans. Today, those same borrowers may be at risk as their payments begin adjusting upward. With prime rate steadily increasing since July 2004, borrowers with a $50,000 home-equity line of credit (HELOC) may have already seen their payments increase by $90 a month -- and rates are still climbing.
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