Ways Not To Have Mortgage Insurance

Just few years ago, buying a home with less than 20 percent down, you had only two options to evade paying mortgage insurance.

Splitting your mortgage in two - no mortgage insurance

It is called piggyback loan by mortgage professionals. Lets look at this example:

You bought the house for $200,000 with the down payment of $20,000 which is only 10 percent. Normally you would take one mortgage for $180,000 and pay mortgage insurance for a long time. The monthly insurance amount would be around $78, based on this approximate private mortgage insurance rate.

Instead, you'd take first mortgage for $160,000 and the second mortgage for $20,000. $160,000 comprises 80% LTV and $20,000 is the remaining 10%.  No private mortgage insurance whatsoever. Such a split is called 80/10/10, meaning 80% is first or main mortgage, 10% is second mortgage and 10% is the down payment. Another popular split is 80/15/5 when you put only 5% down.

So with no money down you are talking 80/20.

There is catch, of course, in the second mortgage interest rate, it is going to be often quite high. How high depends on other conditions -your income, your credit and down payment. But normally it is from 1.5 to 2% higher than the interest rate on the first loan.

Many people don't like the two mortgages  scenario with two separate payments. The second mortgage is quickly sold or transferred to a different lender. So the original lender keeps only first mortgage for 80%, thus minimizing its risk if you default on your mortgage payments, and also making several thousand dollars by selling your second, high interest loan to another lender. That other lender hopes to make money on the high interest rate you must pay, unless you refinance quickly. To prevent you from refinancing, certain lenders impose prepayment penalty. Even without prepayment penalty you may encounter difficulties refinancing.

Going to sub prime lender  - no mortgage insurance

Hate to repeat, but "just few years ago" sub prime mortgage lenders were something of bad guys in the mortgage industry. The only people going to a sub prime lender were those with the hopeless credit or low down payment cases or both. But sub prime lending had significantly evolved and now offers a very valuable alternative in many situations.

In the case of low down payment - high LTV scenario, sub prime lender is often a better way these days. You'd have one mortgage at a higher rate. It works especially well if you have sufficient verifiable income and an established credit history with FICO score above 620. In such a case, your rate is often about .75% higher than the rate you would obtain with down payment of 20%, but can be way higher in some cases.

Basically what sub prime lender does, it pays mortgage insurance instead of you, recovering more than enough in the interest you pay. The advantage for you, the borrower is that the mortgage interest is tax deductible.

Other things sub prime mortgage lenders are good at are:

Average credit score
Bad credit mortgage

Conclusion

Keep in mind that there would be additional closing costs for the second mortgage, although those could be as low as couple hundred dollars.

On the other hand, sub prime lenders often charge quite high closing costs.

Before you decide which option to choose, sit down with your mortgage broker and have him or her run the numbers.

See more on lender paid mortgage insurance.

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