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Second Mortgage vs PMI

Second Mortgage to offset PMI

Many homeowners find it difficult to find the funds for a 20 percent down payment on their homes. Without the down payment, it becomes mandatory for home buyers to go in for PMI (Private Mortgage Insurance). The PMI has to stay in effect until such time that the value of the home appreciates to a loan-to-value ratio of 80 percent. Once that happens, the homeowner can look at refinancing options.

The other option to avoid PMI is to go for a piggyback loan which combines first and second mortgages to take care of the down payment portion also.

Will a Second Mortgage to offset the PMI requirement make sense for you? Consider the following factors before you decide how to finance your home:

Interest Rates

Piggyback loans make sense if the interest rates on the second mortgage are comparable to the rate on the first mortgage. Paying high rates on the second mortgage will give you no discernible benefit compared to the PMI option.

Term of Second Mortgage

Second mortgages usually attract a higher interest rate so it makes sense to pay them off as quickly as possible. Opt for a shorter term to make best use of the piggyback maneuver.

Closing costs

Second mortgages usually come with negligible or in some cases even zero closing costs. Thus, they may make an attractive financing option compared to PMIs.

Appreciation of home values

If homes in your neighborhood appreciate quickly enough, a PMI may make more sense. This will mean that as soon as your home value reaches the target 80 percent loan-to-value mark, you can refinance instead of being stuck with a second mortgage for a longer time frame. Do some number crunching and figure out which option makes better sense for you.

Tax deductions

Do you belong to a high tax bracket? Then take advantage of the tax deductible interest payments on both your primary and second mortgages. Finance your home and reduce your IRS obligations at the same time.

The above guidelines can give you a better picture of the comparative benefits of PMI or piggyback mortgages for financing your new home. Your ultimate decision should be guided by your particular financial situation.


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