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Bridge loans: The best financing tool for some difficult situations

National Mortgage Professional
Dec 07, 2004

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 for borrowers. 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 homebuyer. 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 LTV Monthly MI on a 90 percent Loan $656 80-10-10 Fixed 15-Yr. $652 Single-Premium MI $625 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 LTV Monthly MI on a 95 percent Loan $706 80-15-5 Fixed 15-Yr. $723 Single-Premium MI $664 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 He may be reached at (410) 902-7000 or e-mail [email protected]
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