Mortgage insurance becomes a better homebuyer valueKenneth J. KlawansMortgage insurance statistics
As interest rates rise, the attraction of "combo" or "piggyback"
mortgage loans is dimming for both lenders and homebuyers.
Historically low rates over the past two years made combo loans
viable, providing lower monthly payments than traditional 30-year
fixed mortgages and loans with mortgage insurance (MI). Now,
however, the same factors that made combo loans appealing--low
interest rates and high appreciation potential--could work against
them. The continued rise in home prices is making it harder than
ever for borrowers to raise a 20 percent down payment. With every
increase in short-term interest rates, combo loans become more
expensive for borrowers to secure and, in some cases, maintain.
A looming danger for borrowers
By choosing a combo loan, a borrower could easily end up with an
adjustable-rate, interest-only first loan, combined with an
interest-only, variable-rate HELOC. Any rise in interest rates
could mean the borrower would build little or no home equity.
Higher monthly payments could even put the loan in jeopardy.
While borrowers can avoid the interest rate exposure of a HELOC
by getting a fixed rate, closed-end second in their combo,
increases in short-term interest rates make fixed, closed-end
seconds more expensive.
That's why mortgage insurance deserves a second look, especially
from new loan officers who've focused primarily on combo loans.
Today's MI is competitive on price and offers additional benefits
to both the borrower and the lender. Focusing solely on combos in
today's environment means missing the market and putting borrowers
at a disadvantage.
Lenders need to know that MI is the competitive answer and the
safer alternative for borrowers. That's because mortgage insurance
offers several benefits, starting with a competitive monthly
payment, compared to combo loans. MI can be canceled when the
loan-to-value (LTV) reaches 78-80 percent, potentially lowering the
monthly mortgage payment. In addition, it is only one loan, with
one monthly payment for the borrower, one loan file, one underwrite
and minimal expenses for the lender. In addition, MI does not
impair a borrower's access to the home's equity, and it isn't
interest-rate sensitive, providing value, security and certainty
Competition sparks innovation
In recent years, competing against combo loans has generated many
MI innovations. Working to give consumers low down payment
financing options, mortgage insurance companies have developed a
new generation of insurance products.
Many MI products provide homeowners with the lowest monthly
payments when compared to non-traditional financing options such as
combos, adjustable-rate mortgages and interest-only loans. With
some of today's products, consumers also receive extra benefits not
necessarily available with other mortgage loans. For example,
families with a 620 FICO score can be approved. On some products,
insurance is added at no additional cost to the borrower, which
covers up to six months of mortgage payments when a homeowner
involuntarily loses his job. These products successfully combine
low monthly payments and unique mortgage protection, providing
additional peace of mind and safety for the first-time
The following comparison illustrates how MI compares against
combo loans in a typical Midwest market. A family of four,
purchasing a median-priced, existing, single-family home with a
value of $116,300, has several low down payment options. With a 10
percent down payment, they have a choice of the following:
†An 80-10-10 fixed, closed-end, second, 15-year mortgage,
with a current interest rate of 7.75 percent;
†Traditional borrower-paid mortgage insurance (BPMI) on a 90
percent first; or
†Single, premium MI on a 90 percent LTV first loan at 5.75
percent (MI premium paid once and financed into the loan).
Monthly Payment Comparisons on 90 percent
Monthly MI on a 90 percent Loan
80-10-10 Fixed 15-Yr.
With a comparable monthly payment, the loan with MI offers one
big advantage; when the borrowers' equity reaches 20 percent (which
would happen in just three years at three percent annual home
appreciation), they can cancel their mortgage insurance. At that
point, the monthly payment would drop to $611. When compared to a
15-year payoff period for the combo loan, that $4 per month becomes
a great value.
Even with as low as a five percent down payment, MI continues to
provide a better homebuyer value--an 80-15-5 fixed, CES, 15-year
mortgage, with a current interest rate of 7.85 percent.
Monthly Payment Comparisons on 95 percent
Monthly MI on a 95 percent Loan
80-15-5 Fixed 15-Yr.
In this example, traditional MI is lower than a combo loan to
start, and if the MI is later cancelled, the monthly payment drops
to $644, a savings of $78 per month over the combo loan.
In survey after survey, first-time homebuyers rate low monthly
payments as a top feature in a mortgage loan. Today's MI is
designed especially for the first-time homebuyer, with a strong
focus on achieving low monthly payments.
When it comes to low monthly payments and ongoing customer
satisfaction, sometimes the traditional low down payment solutions
can still be the best. It's something to consider.
Kenneth J. Klawans is principal of LoanOfficer.com/NetBranch.com. He may be
reached at (410) 902-7000 or e-mail [email protected]