Reasons To Consider A Purchase Money Second And Avoid Private Mortgage Insurance | Mortgage

Reasons To Consider A Purchase Money Second And Avoid Private Mortgage Insurance

There are many home loan options available to home purchasers in today's market. For some, putting 20% down on a property is not an option, so many people have to look for mortgage programs that require less than 20% down. These mortgage programs will require private mortgage insurance also known as PMI. The mortgage insurance increases the monthly mortgage payment, but for some people, there is another option as well.

by DavidGWhite

There are many mortgage options available to home buyers in today's market. For many, putting 20% down on a house is not an option, so many people have to look for mortgage programs that require less than 20% down. These mortgage programs will require private mortgage insurance also known as PMI. The mortgage insurance increases the monthly payment, but for a few people, there is another option as well.

Some people will consider doing a second home loan. These mortgages are also called piggy back seconds or purchase money seconds. The advantage of a second mortgage loan is a reduced down payment, no mortgage insurance, and in most cases a reduced total monthly house payment.

Lower Down Payment

By adding a second home loan, you are able to have a reduced down payment and still avoid mortgage insurance. In order to avoid mortgage insurance, a purchaser must put down 20%, but with a second mortgage loan, you are actually in a sense borrowing a portion of the down payment. Second home loans usually help the client put as little as 5-10% down on a new home.

This is where the term 80/10/10 or 80/15/5 comes from. The numbers represent the loan-to-value ratio compared to the purchase price of the house. The first number is the first mortgage which is usually 80% of the sales price. The second number is the second loan and the final number represents the down payment. For example, if a buyer purchases a property for $200,000 and does an 80/10/10 loan program, then the first mortgage would be for $160,000, the second loan would be for $20,000 and the down payment would be $20,000.

No Mortgage Insurance

By splitting the mortgage loans into two, mortgage insurance is avoided. This can save the homeowner hundreds of dollars a year.

Lower Monthly Loan Payment

For the most part, the monthly mortgage payment is lower when you split the loans into two separate mortgages. Keep in mind though, that the second loan will have a higher rate.

Getting Approved For A Second Or Piggy Back Mortgage

In order to split the loans, you must get approved for a second mortgage loan. Second lien companies have tighter mortgage guidelines and usually require a credit score of at least 700. Also, the maximum debt-to-income ratio for the purchase cannot exceed 45%.

Finally, several second lien companies will not do a second mortgage for a first time home buyer. Also, some mortgage programs, like FHA home loans, do not allow a second lien at time of purchase.

Not everyone will have the ability to split their mortgage loans at time of purchase, so it is crucial to discuss with your loan advisor all your options when it comes to purchasing a new home.

DISCLAIMER: This article is provided as information only and is not to be taken as financial advice.

David White is a Senior Mortgage Officer who specializes in home loans. David has over 12 years experience helping his clients with Dallas home loans. Also published at Reasons To Consider A Purchase Money Second And Avoid Private Mortgage Insurance.