Mortgage insurance or 80/10/10? Danville Mortgage Tips

Comments(0) By Mike Miller •June 21st, 2008

Purchasing a home is a little more challenging these days.

Although diverse products have evolved to help many individuals, the problem of achieving a 20% down payment eludes nearly 1/2 of all homebuyers. Without a 20% down payment, purchasers are required to pay Private Mortgage Insurance (MI). Lately there has been a lot of focus on 80-10-10 loans as an alternative to paying MI. An 80-10-10 avoids MI by using an 80% first mortgage, a 10% second mortgage and a 10% down payment from the borrower. Buyers have been programmed to avoid MI but are the alternatives really better?

I have found that when we compare the differences between paying MI or choosing the 80-10-10, the monthly payment usually ranks as the borrowers highest priority. Since MI is an extra fee, most buyers assume it will result in a higher monthly payment. That is not necessarily the case since the second mortgage portion of the 80-10-10 is usually at a higher rate. Additionally, the rate may be variable on that 2^nd mortgage loan and may have a shorter amortization period. The result is that total payments between MI and the 80-10-10 are very close with the possibility of either program being slightly less expensive on a monthly basis. However, there are a few hidden factors that most borrowers do not consider:

¨ One major benefit of paying MI is that you may be able to have it removed from your loan if your home appreciates in value. While lenders are not required to drop the MI coverage even if you can demonstrate greater than 20% equity in your home (based upon appreciation), you do stand a reasonable chance of having the MI removed.

¨ The biggest benefit from MI for some borrowers could be the fact that the lender will be more accommodating when it comes to approving your loan. With the extra insurance on the loan that MI offers, lenders can overlook some borrower shortcomings or make more exceptions since the loan is safer to approve. This is a critical benefit for borderline borrowers.

¨ The payment for MI is now tax deductible, and there are new creative ways to finance MI for a tax deduction. While it looks like the 80-10-10 is a better choice from a tax benefit perspective, there is a possible future tax woe for users of the 80-10-10 option. Current tax laws allow the deduction of a second mortgage up to $100,000. This also applies to future refinances when cash is taken out of the new 1^st mortgage that exceeds the original 1^st mortgage amount. That means that you are eating up that tax deduction. If you think that you will never use the $100,000 amount in the future, think again. This equity can be used for college costs, purchases, cars and debt consolidation. You may max out your deduction if you use that equity in the future.
¨ There will be more choices with MI since some lenders will not offer a 2^nd Mortgage, causing the borrower to find and coordinate a separate source to fund the 2^nd mortgage. The result could be a higher interest rate first mortgage if you avoid MI.
¨ The 80-10-10 is really 2 different loans so there are 2 separate sets of papers, closings and payments resulting in more hassles.
¨ The current Jumbo limit is $729,750 in Danville and loans above this amount are charged a higher interest rate. The increase is as much as 1.0-1.5%. If you can use the 80-10-10 to avoid both the Jumbo limit on the first mortgage and MI, then it would really benefit you to select the 80-10-10.

While the debate may continue, it is my opinion that tax deductible MI is the better choice for most borrowers unless the 80-10-10 helps the individual avoid paying the Jumbo premium.

Some borrowers are so intent on making a 20% down payment in order to avoid either option that they liquidate their retirement funds to do so. Cashing in your IRA or 401K is a terrible mistake. Tax deferred retirement plans are one of the best tools individuals have for a secure future.

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