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Piggy-back loans vs. Mortgage Insurance: New legislation makes mortgage insurance tax deductible in ‘07 By Melissa Wirkus

For potential homebuyers across the nation, one of the biggest stumbling blocks on the quest to purchase a home is coming up with enough money for the down payment.
With the high price of real estate and property today, many first-time buyers find it almost impossible to come up with the 20 percent traditionally needed for a down payment.
But, with the mortgage and real estate industries constantly changing and evolving, there are a couple of ways to get around putting 20 percent down. These two things are piggyback loans and mortgage insurance; and new legislation has made deciding which one is best for your specific circumstance even harder.
Mortgage insurance is an added monthly payment to a mortgage that protects the lender should the homeowner default on their large loan. A piggyback loan is essentially a second mortgage that is taken out that finances the remainder of the home’s price.
In the past few years, most borrowers have found piggyback loans more attractive because of low mortgage rates. But now, new legislation has made mortgage insurance more attractive because it will be tax-deductible in 2007.
A December 20, 2006 article by Ruth Simon of The Wall Street Journal, “What to do if you can’t put 20% down,” discusses how many homeowners will probably stray away from piggyback loans and turn back to mortgage insurance.
“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, many people will be turning back to traditional private mortgage insurance.
“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.”
This makes mortgage insurance a lot more favorable, especially since interest rates are inching up.
Also, more lenders have been required to put stricter guidelines on their lending standards for piggyback loans, which could make it a lot tougher for people to get into these loans.
If you find yourself unable to come up with the adequate amount for the down payment, you should consider these two options carefully, to make sure which one makes the most economic and financial sense for your specific situation.
“Consumers should compare the monthly payments on a piggyback versus mortgage insurance. If the rate on the home-equity line is more than two percentage points above the rate on your primary mortgage, ‘you should be strongly considering a mortgage-insurance policy,’ says Keith Gumbinger, a mortgage analyst with HSH Associates. ‘But you need to run the numbers.’”

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