From the Wall Street Journal:
What to Do if You Can’t Put 20% Down
Home buyers may now need to pull out their calculators when tackling a common dilemma: what to do if they don’t have enough money for a 20% down payment.
In recent years, piggyback loans, low-cost and easy to get, have been the product of choice for many cash-strapped consumers eager to purchase homes. But with short-term interest rates now sharply higher — currently above 8% — piggyback loans are less appealing. Now, there are signs that some borrowers are giving traditional private mortgage insurance a second look.
New federal tax legislation expected to be signed by President Bush today gives some consumers even more reason to turn to mortgage insurance. The new law makes the insurance premiums tax deductible for some borrowers who take out new mortgage-insurance contracts in 2007. That is in addition to the tax deduction homeowners can already take on the mortgage interest they pay.
What’s more, new guidelines issued recently by bank regulators could make it tougher for some borrowers to get piggyback loans, particularly if these are paired with exotic types of mortgages that may increase risk. Some lenders have already seen higher delinquencies on piggyback mortgages.
For borrowers, whether a piggyback loan or mortgage insurance makes more sense is likely to depend on interest rates as well as an individual’s borrowing needs. “When rates were very low, there was no question that a … piggyback was more economical for consumers,” says Doreen Woo Ho, who runs the home-equity business for Wells Fargo & Co. Now, she says, the two options are “more competitive.”
As the cost difference narrows, Vanessa Meyer, a veterinary technician in Fort Morgan, Colo., opted for mortgage insurance when she and her husband refinanced their mortgage last month. Ms. Meyer says mortgage insurance was “a little bit more [expensive], but we wanted one payment.”
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The popularity of piggyback mortgages has grown sharply. Some 49% of home purchases made in the first three quarters of this year that required financing included a piggyback mortgage, up from 24% in 2002, according to SMR Research Corp., a market-research firm.But there are signs that this growth has stalled and that mortgage insurance may be making a comeback. SMR says piggybacks’ share of the market was flat in 2006, following years of steady increases. Meanwhile, 6.3% of mortgages originated in the third quarter carried traditional private mortgage insurance, up from 5.9% a year earlier, according to Inside Mortgage Finance, an industry publication. The figures are based on the dollar value of loan originations and don’t include mortgage insurance purchased by lenders on a bulk basis.
Mortgage-insurance providers are expecting business to pick up in the wake of the tax-law change, which they had lobbied for. The Mortgage Insurance Companies of America, a trade group, is spending $1.1 million on an advertising campaign aimed at mortgage brokers and real-estate agents. Genworth Financial Inc., a leading mortgage insurer, is running “webinars” to explain the implications of the new law. PMI Group Inc. is sending out 15,000 foam oranges with stickers saying mortgage insurance is now deductible.
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The new tax legislation makes premiums fully deductible for borrowers who take out a new mortgage-insurance contract in 2007, provided they have $100,000 or less of adjusted gross income ($50,000 if married and filing separate returns). The deduction phases out for borrowers with incomes between $100,000 and $109,000. The deduction applies to insurance on mortgages taken out to buy homes and on refinancings, provided the new loan isn’t for more than the amount of mortgage debt being refinanced. To claim the deduction, borrowers must file an itemized tax return. Unless the law is extended, the tax break will expire at the end of 2007.
A piggyback, an I/O, option arm, neg amort all can be/will be piggybacked to the dumps where they belong. Any market,itrrational/manias, always sucks in as many as possible before it stalls and reverses. It doesn’t matter what market, tulip bulbs,dot com or 2005 real estate. This crap ignited the last and final upleg for this market. All this waste will be written about for years to come, “How the gullible got fleeced”.
Why can’t the public utilize the standard means for a down payment and closing cost??? What’s wrong with their savings??
Oh my, I forgot first time since the great depression;
http://bea.gov/briefrm/saving.htm
http://www.businessweek.com/bwdaily/dnflash/content/nov2006/db20061107_523557_page_2.htm
Toll also said he thinks a change in the country’s political structure could help spark a recovery, citing disgruntled consumers staying on the sidelines when it comes to a major commitment such as a home purchase. “Basically, the country’s unhappy, to say the least,” he said. “Perhaps the unhappiness with the foreign affairs, with the domestic situation, with the election in general…[is] spilling over into our market.”
BLAME IT ON WORLD HUNGER !!! WHY NOT !!!
the piggyback is not going away. I have friends in Boston who just purchased a place 2 weeks ago using one. they said the interest rate wasn’t much higher than the main loan. I didn’t question them further
From Marketwatch:
Extra points
A new report claims that borrowers tend to purchase too many points when selecting a mortgage — and in the process end up paying more than they would have with no points and a higher interest rate.
The study was co-authored by Abdullah Yavas, Elliott Professor of Business Administration at Penn State’s Smeal College of Business, and Yan Chang of Freddie Mac. The two considered 3,785 individual mortgages originated from 1996 to 2003, looking at the points paid, interest rates and loan length.
Data showed that, on average, those who buy points are overestimating the amount of time they will hold their loans. They tended to pay off their mortgages about 37.5 months too early for the purchase of points to actually pay off — defaulting, moving or refinancing before hitting a break-even point so the strategy made financial sense.
By purchasing points, borrowers lower the interest rate on the mortgage. One point is equal to 1% of the mortgage, charged as prepaid interest. Points that you pay to purchase your primary residence are deductible in the year you pay them on your federal income-tax return; points you pay to refinance must be written off over the life of your mortgage.
“We underestimate the possibility that we may refinance in the near future — or refinance again in the near future — and we underestimate the possibility that we may have to move, either for job relocation or other reasons,” Yavas said.
Only 1.4% of borrowers who purchased points held their loans long enough to make it pay off; of those who didn’t buy points, only 1.5% would have been better off purchasing them, according to the study.
BTW,
SMR research is based in Hackettstown, NJ. They follow consumer debt mostly but also follow mortgage data.
skep-tic Says:
December 20th, 2006 at 8:14 pm
the piggyback is not going away. I have friends in Boston who just purchased a place 2 weeks ago using one. they said the interest rate wasn’t much higher than the main loan. I didn’t question them further
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your friends sound like a bunch of dummies. boston is tanking and they are newly minted bagholders.
BOOOOOOOOOYAAAAAAAAAA
Bob