February 22, 2008, Newsletter Issue #104: Avoid Private Mortgage Insurance – Piggyback Two Loans

Tip of the Week

All home buyers should do whatever they can to avoid private mortgage insurance. One of the easiest ways to do so is to take out a first and a second mortgage for the amount that you need instead of a single mortgage at a higher loan to value. This is called ‘piggybacking' loans together and here is a quick run down of how this can help you avoid private mortgage insurance.

Understand that private mortgage insurance is only paid when a person has a single mortgage for more than 80% of the value of their property. Now, let's say that you are buying a home that costs $200,000. You can only afford a down payment of $20,000, or 10%. This means that you will need to borrow a total of $180,000, or 90% of the value of the home to make the purchase. If you choose a single mortgage for the full 90%, you will be liable for private mortgage insurance. However, if you choose to take out a first mortgage for 80% ($160,000) and a simultaneous second for 10% ($20,000) you will have no private mortgage insurance mandated.

Some people are afraid to take on two separate mortgages. This is an irrational fear as compared to paying for private mortgage insurance. PMI is just extra fees and has nothing to do with your principal or your interest. Taking on two mortgages is only about the money you borrow and there are no extra costs such as private mortgage insurance. You tell me which is scarier?

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