Private mortgage insurance is making a comeback.
Until six or eight months ago, private mortgage insurance was out of favor as people eager to get into the roaring housing market took adjustable-rate mortgages or "piggyback" loans or some other exotic form of financing. But as the market has cooled and lenders have tightened their standards, many people who want homes, especially first-time home buyers and those with little money for down payments, are choosing traditional fixed-rate mortgages backed by private mortgage insurance, or PMI.
The insurance costs the borrower a monthly fee, typically a set percentage of the total mortgage loan. If the borrower can't repay the loan, the insurance kicks in and the lender gets some of its money back. Because of the guarantee, lenders are more willing to write the mortgages.
It helped Manuel Santa Cruz, who closed on a home last month in Tucson, Ariz. Santa Cruz, a consultant for a biotech company, said he and his wife Michelle were happy to sign up for PMI, which will cost them $150 a month, because it allowed them to get the kind of mortgage they wanted. "We didn't have a lot of money for a down payment, but we had enough income to handle the monthly payments," he said. "And we felt strongly that a fixed rate would be easiest for us to handle."
Pat Lamb, president of the mortgage division of First National Bank of Arizona in Scottsdale, which wrote the mortgage for the Santa Cruzes, said that until about six months ago, most home buyers who didn't have the money for a 20 percent down payment were opting for piggyback loans.
Those loans actually involve two mortgages. In an 80-10-10 configuration, the home buyer puts down 10 percent of the home's value in cash, gets a primary mortgage for 80 percent and then takes a second mortgage for 10 percent.
The advantage of this approach is that the interest on both mortgages can be written off at tax time. The disadvantage is that the rate on the second mortgage generally is at least 2 percentage points higher than on the first and can rise with market rates.