Mortgage Insurance Booms - Set Rate, New Tax Break Sway More Buyers

Amy Hoak, The Wall Street Journal Online

Mortgage insurance is coming back into vogue.According to the Mortgage Insurance Companies of America, 118,214 borrowers used private mortgage insurance while buying or refinancing a loan in February, an 8.5% increase compared with January's 108,980 borrowers. In February 2006, 104,146 borrowers used the insurance, the group reported.

"The mortgage-insurance industry has had a very, very good first quarter," says David H. Katkov, president and chief operating officer of PMI Mortgage Insurance Co. "People are looking at mortgage insurance today as they haven't in previous years."

Mortgage insurance is required for borrowers who make less than a 20% down payment; its purpose is to protect lenders from losses if the borrower defaults on the loan. The insurance is canceled when there is enough equity built up in the home.
In recent years, though, many borrowers have opted to get around paying for mortgage insurance by taking two loans: a primary mortgage as well as a second, "piggyback" mortgage in the form of a home-equity loan or line of credit. The equity from the second loan fulfills the down payment of the first, and borrowers benefit from tax breaks on both loans' interest payments.

Many piggyback mortgages have variable rates that fluctuate based on the prime rate, which has risen over the last year. The set rate for mortgage insurance has become attractive to homeowners aiming for predictable loan costs, says Mr. Katkov. There's also the lure of simplicity that the mortgage insurance offers, since borrowers only need to deal with one set of loan documents in that option.

A new tax break, too, is helping steer home buyers toward mortgage insurance: Certain borrowers who take out a mortgage for purchase or refinance in 2007 are eligible to write off all or a portion of their mortgage-insurance premiums for the year.
Tightened lending standards might also be contributing to the newfound popularity of mortgage insurance. As lenders get more conservative in the aftermath of problems in the subprime market, the risks associated with piggyback loans probably aren't as attractive, says Corey Carlisle, senior director for government affairs at the Mortgage Bankers Association, an industry trade group based in Washington.

That said, piggyback loans will not disappear, Mr. Carlisle adds. For some borrowers, the dual loan structure still makes sense, he says, adding that "everyone needs to weigh their own financial needs separately and do what's best for them."