- The Washington Times - Thursday, March 24, 2005

A few weeks ago, I answered a reader’s question about whether it makes sense to pay private mortgage insurance in lieu of the more popular “piggyback” loan combination.

To recap, borrowers who have less than a 20 percent down payment usually split the financing into two loans — an 80 percent first trust and a 10 or 15 percent second trust, depending on the down payment.

The benefit of such a plan is to avoid private mortgage insurance (PMI), which is a monthly premium added to the monthly payment if the first trust exceeds 80 percent of the purchase price.

The reader’s logic was correct. PMI is a fixed payment. As interest rates rise, the cost of the second trust could exceed the PMI payment.

I simply ran some numbers and determined that an interest rate on a second trust would have to exceed 11 percent for a single loan with PMI to make sense.

After that column was published, I received a letter from a representative of a PMI company who suggested that I write about yet another program, often called “lender-paid PMI.” The lender simply raises the interest rate on loans that exceed 80 percent of the purchase price.

Off the bat, I see some benefits. First, because the interest rate increases on the loan instead of a separate PMI payment being added, there’s a better tax advantage. PMI premiums are not deductible, but mortgage interest is.

Second, the borrower doesn’t have to fool with writing two checks to pay for two loans every month.

Third, because there is only one loan at settlement, closing costs may be less than in a piggyback arrangement.

Now let’s run the numbers to see which is really better.

I’ll use a purchase price of $375,000 with a 5 percent down payment. Under a lender-funded PMI scenario, the borrower would take out one 95 percent loan in the amount of $356,250.

With lender-funded PMI, a 30-year fixed rate would run about 6.125 percent. The principal-and-interest payment would be $2,165 per month, one loan and one payment.

Let’s run the numbers using an 80-15-5 program (80 percent first trust, 15 percent second trust, 5 percent down payment).

The first-trust loan amount would equal $300,000. Because the loan amount does not exceed 80 percent of the purchased price, the interest rate should be about 0.375 lower, or 5.75 percent.

The P&I; payment on the first trust equals $1,751.

Now, we have a 15 percent second trust for $56,250 to deal with. Today’s fixed rate for the second trust is 7.50 percent.

The P&I; payment on the second trust is $393 per month.

Add the two payments together and we have a total of $2,144 per month — $21 less than the single lender-paid PMI program. It’s not much of a difference.

The lesson? A regular loan with PMI should be avoided, but if you plan to buy a house with less than 20 percent down, have an experienced loan officer run the numbers. The lender-paid PMI program may be better for your situation.

Henry Savage is president of PMC mortgage in Alexandria ([email protected]).



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