Insurance Against Rising Mortgage Payments

There’s good news for those shocked by rising payments on interest-only and adjustable-rate mortgages. It’s possible an insurance product may help eliminate some of the stress.

Interest-only loans and adjustable-rate mortgages, made popular when interest rates dipped below 5 percent, made low monthly payments possible even when borrowers put little or no money down.

However, many homeowners are now seeing payment increases as low introductory rates increase and interest-only periods end. 

Experts believe the increases are contributing to rising foreclosures-up 45 percent in January, according to foreclosure listing service RealtyTrac.

“One trillion dollars worth of mortgages will reset to new interest rates next year-we could be facing a major crisis,” said Bill Ruh, Government Affairs Director of the California-based Citrus Valley Association of Realtors. “Buyers may think they can only purchase a home using a short-term or fancy combo loan, but the reliable 30-year-fixed mortgage is an attainable and secure option.”

While many have tried to avoid it in the past, new types of private mortgage insurance (MI) offer that secure option, providing a lower monthly payment than many combo loans.

One type of mortgage insurance, called “single premium”, lets buyers borrow the full amount needed, with no added monthly fees because the one-time premium is financed within one loan. And if the value of the home appreciates enough to cancel the insurance within the first five years, buyers receive a partial refund. In today’s real estate environment, mortgage insurance sometimes cancels in as little as two to three years.

Compare the savings on a “single premium” loan to a “piggyback” mortgage on a $175,000 home purchased with a 5 percent down payment.

The single premium loan has a $1,076 monthly payment, while the piggyback is $1,142 per month. If the mortgage insurance were canceled after three years, the single premium loan holder would receive a one-time refund of $1,630.

Said Kevin Schneider of Genworth Financial, Inc., “With single premium products, monthly payments are among the lowest, and homeowners have peace of mind knowing that payments will not fluctuate.”