Santa Cruz Sentinel

Local Business

Subscribe

Combining first, second mortgages saves on insurance

The good news is that it is not necessary to have a large down payment to buy a home. Gone are the days when a 20 percent down payment was the norm. However, lenders still get nervous and consider themselves at more risk when asked to loan a home buyer more than 80 percent of the value of the home.

When asked to loan more than 80 percent of a home’s value, lenders want to be compensated for the increased risk that they face. The concern is that if the homeowner’s are not able to make the payments, will the lender be able to recoup their loan and expenses when the property is foreclosed upon.

The mortgage insurance industry was created to provide lenders with protection in the event there was a foreclosure. Lenders require borrowers to procure mortgage insurance when they are asked to loan more than 80 percent of a home’s value. Mortgage insurance is expensive and can add a premium that is equivalent to another ½ to 1 percent to the interest rate of a loan.

For example, if a home is purchased for $400,000 and the buyer wants to buy the home with a $20,000 down payment, or 5 percent of the sales price, the lender will require mortgage insurance, which will cost around $230 per month.

Fortunately there is an alternative to mortgage insurance and that is a first and second mortgage combination. Keeping the first mortgage at 80 percent of the value of the home avoids mortgage insurance. The second mortgage can make up the difference (up to the remaining 20 percent).

Furthermore, unlike in the not too distant past, second mortgages are available as fully amortized 30-year loans.

In the above example, the first mortgage would be for $320,000 and the second would be for $60,000 for a combined $380,000 of financing. This removes the need for mortgage insurance; however, interest rates on second mortgages are from 1 to 2 percent higher than rates on first mortgages.

This increased rate on the second mortgage will increase the payments in this example by just $60 per month.

That is a substantial savings over the $250 per month mortgage insurance premium. Furthermore, interest on this second mortgage is tax deductible and mortgage insurance is not deductible.

The term used to describe this combination of mortgages is "80-15-5" because the first mortgage is 80 percent of the home price, the second mortgage is 15 percent of the home price and 5 percent will be the cash down payment. A borrower buying with 10 percent down could obtain "80-10-10" financing. The second mortgage would be for 10 percent of the sales price.

There are several other factors which should be considered when obtaining a second mortgage to purchase a home. Discuss these with your mortgage professional before making a commitment.

Peter Boutell is a mortgage consultant with a local mortgage company. Send questions to "Lending A Hand," 1535 Seabright Ave., Santa Cruz, CA 95062, or fax to 425-1044. E-mail may be sent to Peter@SantaCruzHomeFinance.com.

Combine first and second mortgages to avoid mortgage insurance

Subscribe