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In essence, borrowers take out more than one loan for the full purchase price of the home and avoid paying for mortgage insurance.
But as recent history has shown, piggyback loans are not without a downside. Because the second mortgage is usually structured as an ARM, homebuyers can be vulnerable when interest rates increase and loans reset.
In many cases, mortgage brokers and homebuyers are discovering that MI can actually keep monthly payments lower for borrowers than a piggyback-loan scenario. For example, borrowers in an 80/10/10 piggyback-loan scenario -- in which they take an 80-percent first mortgage and a 10-percent second mortgage and supply a 10-percent downpayment -- can be left with a higher monthly payment until they pay off the second mortgage than they would have had with a single loan and MI.
Knowledgeable mortgage brokers can counsel homebuyers whose homes are expected to appreciate in value quickly that MI could be a better option for them. This is because it can be canceled when the loan-to-value ratio reaches 80 percent or less, unlike a second mortgage that must be paid off for the payments to end.
Four types of MI
Many borrowers and brokers don't realize that mortgage insurance can be structured one of several different ways. Each offers benefits to specific borrower situations. Here are the four basic types:
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Borrower-paid monthly MI: As the name suggests, borrowers pay a monthly premium for the insurance coverage, which is typically worked into the monthly mortgage payment. The premium remains in effect until the loan balance reaches 78 percent of the home's value when the loan was made.
One-time lump-sum MI: This option lets borrowers pay the premium in one lump sum. It covers them for the life of loan and can be financed into the loan itself.
Lender-paid monthly MI: Under this scenario, the lender pays the premium on behalf of borrowers, who, in turn, are charged a slightly higher interest rate on their loan. This option gives borrowers enhanced tax-deductibility because the cost is rolled into the tax-deductible interest amount. Lender-paid MI can also result in lower closing costs for some buyers.
Split-premium MI: Here, the cost of the premium is split between an upfront payment and reduced monthly renewals. This option can give homebuyers a lower monthly mortgage payment or the ability to afford a more expensive house.
Mortgage insurance can be an effective tool for mortgage brokers to help their clients realize homeownership. Although it has suffered from some misinformation and misunderstanding, it continues to allow homeownership while simultaneously protecting lenders.
Brokers who wish to provide more options for their clients can look to mortgage insurance as a way to help.
Anthony A. Bruschi is vice president of secondary and correspondent sales for Radian Guaranty, the primary mortgage-insurance subsidiary of Radian Group Inc. (NYSE: RDN).
The company's Web site is www.radian.biz. Reach Bruschi at (800) 641-6794 or firstname.lastname@example.org.
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