Mortgage Insurance vs 2nd Liens

Mortage Insurance

ortgage insurance (MI) allows you to choose from a wider price range of homes. How? Lenders are generally willing to accept a lower down payment than the standard 20% if the lender obtains mortgage insurance on your loan through a mortgage insurance company.

By putting less money down, you can conserve your savings and with a larger loan amount you will have higher interest payments and could result in higher tax deductions.

	Without MI	With MI	With MI
Down Payment	20%	10%	5%
Your Available Savings	$10,000	$ 10,000	$ 10,000
Maximum Home Price	$50,000	$100,000	$200,000

Financing a home with a low down payment loan may be the best way to afford a home in high-priced markets.

	Without MI	With MI	With MI
Home Price	$100,000	$100,000	$100,000
Down Payment	20%	10%	5%
Cash Down Payment	$20,000	$10,000	$5,000
Savings	$20,000	$20,000	$20,000
Savings Retained	$0	$10,000	$15,000

Even if you have less than $20,000 saved, you can still afford to buy a $100,000 home with a lower down payment option if your lender obtains MI on your qualified loan from a mortgage insurance company.

For example, on a purchase price of $300,000, using a straight 90% LTV loan with MI, the regular principal, interest, taxes, and insurance (PITI) payment for a loan of $270,000 at 8.5% would be $2,076.07. The added MI cost would be $117.00 (that's for a fixed rate mortgage; on an adjustable rate mortgage, the cost would be $141.75) for P & I total of $2,193.07. Now if the financing were segmented into two loans, one for $240,000, which is 80% LTV, still at 8.5% and a second loan for $30,000 at 10.25%, the payments respectively would be $1,845.39 and $268.03 for a total of $2,113.42, saving $79.65 per month.

The further advantages to the combination first and second lien concept versus a straight 90-95% LTV loan is that Mortgage Insurance is not interest, therefor not tax deductible, whereas everything except the principal pay-down is deductible in 80/10/10 or 80/15/5. Furthermore, it is difficult to have MI removed from a loan even if the borrower gets to the 80% threshold. One other importatnt factor is you can pay the higher rate second loan on an accelerated basis (i.e. 30 year 1st with 15 year 2nd ) and then only the first loan will remain.

This may not seem like much, but if the borrower paid extra principal to payoff the second loan early, he/she would be left with only the remaining lower interest first lien to payoff. It is important to note that not all loan programs will allow 80/10/10 or 80/15/5 financing. For example, many Fannie Mae and Freddie Mac programs will only loan 75% if there is a second loan.

• Both of these financing options can be an important aspect of less money down or out of pocket expenses. Be sure and consult with your lender to see which one would be best for you.