Private Mortgage Insurance

A few weeks ago I had talked about ways you can take advantage of rising home prices. Today, there is a great article out on the website talking about how Private Mortgage Insurers are fighting back to regain some lost market share.

How are these two related? Let me explain. When you can’t put 20% down as you buy a home, lenders will ask you to purchase Private Mortgage Insurance. This is becuase lenders veiw loaning more than 80% against the value of the collateral (your home) as riskier and so they want you to share in that risk. With home ownership increasing in the the United States and this largely because you were not required to put 20% down, PMI companies grew tremendously rich.

Then of course lenders started offering piggyback loans. Your first loan covers 80% of the value and the remaining, 10, 15 or even 20% is part of a second home equity type loan (the piggyback loan). The benefit of this of course is that the interest you pay on the second loan is also tax deducatable, whereas PMI is not. Lenders loved it, because now they were able to take away your PMI and divert that money to themselves. Unlike the PMI (which disappears when your principal balance falls below 80%), the piggyback loan stays until you pay it off – and depending on your situation you may not pay it off for a very long time.

Piggybacks loan ate away at PMI marketshare and profits. Now we learn that they are fighting back with new products, new terms, and are even asking Congress to make PMI expense tax deductible.

A few weeks ago I mentioned how you can use the increase in the value of your home to do away with PMI. You can do this because if you bought the home at $200,000, and borrowed $190,000 (95%), if you house is now worth $235,000 – your now only owe about 80% (remember, you’ll have paid off some of the principal too). So, you can call your lender to cancel PMI.

Whether PMI is good for you or a piggyback loan – it is completey dependent on your situation and how fast your home is appreciating. I hope to do some further analysis on this and post it on this blog in the near future.

Got questions? E-mail me. I would love to hear from you.
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