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Preparing for Home Ownership
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Mortgage Insurance

Mortgage Insurance Might Be RequiredIn addition to purchasing insurance for a home, borrowers may also be required to have mortgage insurance. Mortgage insurance insures the loan to protect the lender in case the borrower defaults. It is usually required whenever the borrower makes less than a 20% down payment. There are special programs offered that enable the borrower to avoid paying this mortgage insurance. Lender-paid mortgage insurance is when a lender charges a slightly higher rate of interest instead of mortgage insurance.

How to Avoid Paying Mortgage Insurance
To avoid the need to pay mortgage insurance, there are also combination or “piggy-back” home loan programs called 80/10/10, 80/15/5, or even an 80/20. These are multiple home loans taken out at the same time. The first home loan (a “first lien” loan) is an 80% LTV, and a second loan (a “second lien”), that is usually for a shorter term and a higher rate of interest, represents additional financing. The third number is the amount of down payment. Because the first loan does not exceed 80% LTV, no mortgage insurance is required when a second loan is closed at the same time with the first loan. Second lien loans are typically a fixed rate second loan or a variable rate home equity line of credit (HELOC). See the following table for a sample breakdown using these programs:

Combination (Piggy-Back) Financing with a First and Second Loan
Purchase Price: $180,000 80/10/10 80/15/5 80/20
First lien loan $144,000 $144,000 $144,000
Second lien loan $18,000 $27,000 $36,000
Down Payment $18,000 $9,000 -0-

Learn the Details Before Choosing
These programs can be very beneficial for some borrowers. There can be tax advantages to paying interest on the second loan vs. paying mortgage insurance, but, they are not always the best solution for a consumer. If you had to sell in the first few years, in some scenarios you could end up owing more than you would gain from selling the home. Go over the details of any of these programs very carefully with your home loan consultant before choosing this option.

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