Should I Pay PMI or Take a Second Mortgage?

Is property mortgage insurance (PMI) too expensive? Some home owners refinace a second low rate mortgage from another lender to bypass PMI payment requirements. Use this calculator to see if this option would save you money on your home loan.

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Property Information
Home Value : ($)
Additional Information
Annual PMI :
Down Payment :
  Standard 80% Loan Second Loan
Interest Rate : (%) (%) (%)
Length : Yrs Yrs Yrs
Points : (%) (%) (%)
Closing Costs : ($) ($) ($)
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Down Payments & Property Mortgage Insurance

When you buy a home, it is traditional to put down a 20 percent down payment. 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.

Second Mortgage Loan. 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.

 

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