|Points Value :||$2,700.00||$3,600.00||$300.00|
|Closing Costs :||$1,200.00||$700.00||$1,000.00|
|Total Closing Costs :||$3,900.00||$5,600.00|
|Down Payment :||$30,000.00|
|Upfront Cost :||$33,900.00||$35,600.00|
|Amount Financed :||$270,000.00||$240,000.00||$30,000.00|
|Monthly PI :||$1,449.42||$1,835.98||$253.16|
|Months With PMI :||78||0||0|
|Monthly PMI :||$112.50||$0.00||$0.00|
|Monthly Payment :||$1,561.92||$2,089.14|
|Total Interests Paid :||$251,790.62||$106,045.37|
|Total PMI :||$8,775.00||$0.00||$0.00|
|Total Payments :||$530,559.60||$376,037.25|
When you take out your home mortgage loan, you might want to consider taking out an 80/15 loan in order to avoid PMI. By going this route, you could potentially save a great deal of money, though your upfront costs may be a bit more.
Pretend the home you are interested in purchasing has a value of $300,000.00 and you are prepared to put down $30,000.00 as a down payment. With a standard 30 year loan with an interest rate of 5.000% and 1.000 point(s), you will have to pay $33,900.00 up front for closing and would have a monthly payment of $1,561.92. In the end, you will have paid $530,559.60 toward your home.
If you opt for an 80/15 loan, you can avoid making PMI payments altogether. Because it involves taking out two loans, however, you will have to pay a bit more in upfront costs. In this scenario, that amounts to $35,600.00.
Your monthly payments, will be slightly HIGHER at $2,089.14.
And, in the end, you will have paid only $376,037.25 — that's a total SAVINGS of $154,522.35!
Down Payments & Property Mortgage Insurance
When you buy a home, it is traditional to put down a 20 percent down payment on the first mortgage. However, few of us have that much cash on hand for just the down payment — which has to be paid on top of closing costs, moving costs and other expenses associated with moving into a new home, such as making renovations. U.S. Census Bureau data shows that the average cost of a home in the United States in 2010, the last year for which the data was compiled, was $272,900. A 20 percent down payment for a house that price would be $54,540.
The benefit of coming up with the hefty 20 percent down payment is that you can qualify for lower interest rates and can get out of having to pay private mortgage insurance, or PMI. When you make a down payment of less than 20 percent, you have to pay PMI to protect the lender in case you default on your mortgage. PMI can cost hundreds of dollars each month, depending on how much your home cost. Typically, when you pay down the mortgage enough to build up 20 percent equity in your home, your PMI is automatically canceled.
Another way to get out of paying private mortgage insurance is to take out a second mortgage loan, also known as a piggy back loan. In this scenario, you take out a primary mortgage for 80 percent of the selling price, then take out a second mortgage loan for 20 percent of the selling price. Some second mortgage loans are only 10 percent of the selling price, requiring you to come up with the other 10 percent as a down payment. Sometimes, these loans are called 80-10-10 loans. With a second mortgage loan, you get to finance the home 100 percent, but neither lender is financing more than 80 percent, cutting out the need for private mortgage insurance.
Making the Choice
There are many advantages to choosing a second mortgage loan rather than paying PMI, but the ultimate choice depends on your personal financial circumstances, including your credit score and the value of the home.
The financial advantage of a second mortgage loan is that you are able to deduct the cost of the interest, which can bring down your overall financial obligation over the life of the loan. You can only deduct the cost of private mortgage insurance under special circumstances, including meeting income limits. Some second mortgage loans are also issued as home equity line of credit loans. That means that once you pay off the loan, you still have a line of credit that you can draw from whenever you need to make updates to the house or wish to consolidate your other debts.
The drawback of a second mortgage loan is that it may be more difficult to qualify for the loan and the interest rate may be higher than your primary mortgage. Most lenders require applicants to have a FICO score of at least 680 to qualify for a second mortgage, compared to 620 for a primary mortgage. Though the second mortgage may have a slightly higher interest rate, you may be able to qualify for a lower rate on the primary mortgage by coming up with the “down payment” and eliminating the PMI.
Ultimately, cold, hard figures will best help you make the decision. Our calculator can help you crunch the numbers to determine the right choice for you. We compare your annual PMI costs to the costs you would pay for an 80 percent loan and a second loan, based on how much you make for a down payment, the interest rates for each loan, the length of each loan, the loan points and the closing costs. You get a side-by-side comparison showing you what you can save each month and what you can save in the long run.
Additional Second Mortgage Uses
In addition to getting around PMI payments, some other common reasons people get a second mortgage include:
- consolidate other higher interest debts into a single lower interest payments
- creating a home equity line of credit (HELOC)
- home repairs & improvements
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