Avoid Mortgage Insurance
Typically, if you are getting a conventional loan (a non-government loan) to purchase a house, you will have to pay mortgage insurance if you have less than 20% of the purchase price as a down payment. However, if you have 10% down, you can avoid mortgage insurance by getting a second mortgage for 10% of the purchase price. Here’s how that works.
Eighty, Ten, Ten
Most conventional loans require mortgage insurance (MI) if the amount of the mortgage is for more than 80% of the value of the house. That means you have to put at least 20% down to avoid paying for mortgage insurance. If you have 10% down, though, you can get a first mortgage for 80% of the value, and a second mortgage for 10% of the value. Because neither one of the mortgages are for more than 80% of the value, there is no requirement to pay MI. These loans are known as 80-10-10 loans (pronounced “eighty, ten, ten”). The “eighty” stands for the 80% first mortgage, the first “ten” stands for the second, 10% mortgage, and the final “ten” stands for the 10% down payment.
The interest rate for the second mortgage is higher than the interest rate for the first mortgage, but in most cases, it will be cheaper to get a second mortgage than it would be to pay for mortgage insurance.
There are some things to be aware of, however. First, when you get a second mortgage at the same time you get a first mortgage, the rate for the first mortgage will be slightly higher than it would be if there weren’t a second mortgage. The loan is riskier for the lender because there is no mortgage insurance to pay the lender if you go into foreclosure, so lenders charge higher rates to compensate for the additional risk.
Also, second mortgages are often home equity lines of credit (HELOCs) and are based on the Prime Rate. The Prime Rate changes whenever the Federal Reserve raises the Federal Funds rate, and there is always the possibility that your second mortgage interest rate will be higher than it was originally. HELOCs are adjustable rate mortgages (ARMs), so you need to be comfortable with your interest rate changing.
Total Cost Analysis
It’s difficult to figure out by yourself if it makes more sense to get a second mortgage than it does to pay mortgage insurance, but luckily, we have some excellent software that allows us to compare the two options for you. It shows how much your savings would be each month, over 5 years, and over the life of the loan (usually 30 years).
There are other options for people who want t avoid mortgage insurance, too. We have loans that don’t require any money down and don’t require MI, and we can also purchase lender-paid MI for you. Lender-paid MI is still mortgage insurance, but the lender, rather than the borrower, purchases it. That cost is passed on to you, but if you have the money available, it might make sense to get lender-paid MI. Again, we can compare the options for you with the software we have.
Regardless of which way you go, keep in mind that the cost of mortgage insurance, as well as interest rates, are determined in large part by your credit score. Higher scores almost always save you money. If you need advice on how to raise your credit scores, contact us and we will be happy to help.