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2/28 ARM and PMI

Mortgage Library: Ask a Mortgage Related Question: Answers: 2/28 ARM and PMI

Question:

We are going through the preliminary stages right now of getting approved for a new house build. Both of us suffered heavy financial woes in our previous relationships and have been diligent in rebuilding our individual credits over the past couple of years.

Still, our lender has told us that they will more than likely offer us a 2/28 ARM. I understand some of the ramifications with this and there should be no problem in 2 years doing a re-fi, however -- I asked about PMI as they stated the required down payment would be between 5-10%, and they noted that there is no PMI because it is rolled into the loan and there would be a higher interest rate due to that.

Is this the same thing as the lender buying up the PMI? Is this a good idea or should I be asking about doing a piggyback? 

T. G.

Westfield
Indiana

Answer:

Interesting dilemma, T. Let's see if I can explain it this way: There are essentially two flavors of mortgage loans -- those for people with good credit and those for people with not-so-good credit (actually three types of loans but we don't need to go into government loans).

The loans for people with A-credit are the ones you see & hear advertised; typically something like a 30-year fixed rate loan for 6.5% interest or so. Whenever you have an A-paper loan over 80% of the home's value, there will be an additional monthly cost called Private Mortgage Insurance (PMI). That is why you hear a lot about combo (piggyback) loans like the 80/20, 80/10/10, etc. When you have a combo loan, there is no single loan more than 80% loan-to-value (LTV) so there is no PMI.

Loans for people with subprime credit are rarely advertised because the rates are so much higher. The most common term for a subprime loan is the 2/28 ARM, but they are also available in longer ARM increments and fixed. Because of the way subprime loans are financed and sold, there is no PMI. You could have one loan for 100% LTV and there will still be no
PMI. Most subprime products require a 80/20 combo when doing 100% financing, and there's really no benefit to having one loan over two in this case, but 100% loans are available.

So it sounds to me like either your loan officer isn't doing a good job explaining this to you, or he doesn't know what he is talking about. Some loan officers may push borrowers into a subprime loan simply because they're easier to get approved and there is often more profit for the loan officer.

So to answer your questions: depending on your qualifications, you may or may not have to put 5-10% down. Since this sounds like a subprime loan, in a way the PMI is rolled in and is a result of the higher interest rate. Is a piggyback a good idea? Possibly. It depends on your qualifications and I don't know enough about you to give an informed opinion. In general, if you can qualify for an A-paper loan then a piggyback loan is a good idea. If you do not qualify A-paper, then it doesn't really matter.

Call me if you'd like a second opinion. I'll be happy to run your qualifications and see what I come up with. Good luck.

Rick Lanicek
PrimeLending, A PlainsCapital Company
17950 Preston Rd Ste 50
Dallas, TX 75252-5759
(972) 705-9721
(800) 256-0817 Ext 202
Mobile (214) 552-6125
eFax (972) 692-7260


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