Private mortgage insurance is coming back

Buyers taking fewer piggyback loans in an effort to avoid paying mortgage insurance

Of all of the things that consumers have to pay for when buying a home, none touches nerves quite the way private mortgage insurance does. Private mortgage insurance, known as PMI, is generally required for all loans for which the primary mortgage equals or exceeds 80% of the purchase price of the house. If the down payment is less than 20%, and they often are, the buyers are required to pay PMI in order to protect the lender against a portion of the home’s value. Lenders feel that buyers who put down less than 20% are more risky. If a buyer puts down only 10%, the PMI protects the lender against the other 10% that would have constituted a 20% down payment.

Consumers don’t like paying PMI for a couple of reasons. First of all, it’s expensive. Second of all, they get nothing for it. It’s money that’s added to your loan amount each month for which buyers feel that they are getting nothing in return.

In recent years, many buyers have managed to avoid PMI by taking out “piggyback” loans. In addition to the primary mortgage for 80% of the purchase price, buyers would take out a home equity line of credit for the remaining 20%, in effect borrowing against the house they were trying to buy. By doing this, they managed to avoid paying PMI, although they then had two payments each month, including one with a variable rate of interest.

That variable rate of interest has become a problem, and is forcing buyers back to private mortgage insurance. As interest rates rise, the home equity portion of piggyback loans is becoming rather expensive, making it less attractive for buyers. The solution for that? Private mortgage insurance again, this time with a twist, if the buyer wants it. Some lenders are now easing the burden of PMI by adding the total premium to the amount financed. It adds some interest to the payment, but makes paying the PMI more palatable for some buyers.

There is one potential downside to financing PMI that way, and that is that it’s harder to drop it if you have added the premiums into your financing. Many buyers, especially those in areas with rapid increases in housing values, have been able to get their lenders to drop PMI from their mortgages once their equity increased to a point where the loan represents less than 80% of the value of the house. All that is necessary for that is ask the lender to drop it and to provide a recent appraisal that shows that the homeowner’s equity exceeds 20%. It’s easily done if you are paying your PMI monthly; it’s harder to do if you have financed the premiums over a thirty year period.

Like most everything in the lending business, what was once old is new again. In this case, it looks like private mortgage insurance is back, along with those dreaded premiums. Until rates go down again, buyers have little choice other than to put more money down.