Refinance :: Home Equity Mortgage Refinance Loan :: Second Mortgage Loan Refinance

How to Avoid PMIs

Using the 80-10-10 Method
Using an 80-20 Program
Borrow against a cash asset
Refinance to eliminate PMI

PMI - Private Mortgage Insurance. It almost sounds like something that you would want, doesn't it?  Well, it isn't.

PMI is insurance, but it doesn't cover you. It covers your mortgage company. Its only advantage to you is that its existence allows you to purchase a home with little money down. See What is Private Mortgage Insurance.

The reason why you'd like to avoid Private Mortgage Insurance is the cost. We can't give you exact numbers, because the lenders have a complicated formula for figuring out the amount based on the mortgage loan amount, the percentage you put down, etc.  But I can give you an example.

On an actual real estate loan amount of $81,000, which was 90% loan to value, we found a PMI payment of $70.20 per month. Principal and interest on this same loan was $560, so PMI added 12 ½% to the mortgage payment each month. This borrower's total payment was $630.20, plus taxes and insurance.

The easiest way to avoid Private Mortgage Insurance is to make a down payment of 20% of the home purchase price out of your own cash, but of course that isn't always possible.  However, when your credit scores are good, savvy lenders will help by giving you two real estate loans instead of one.

The 80-10-10 Method

In the example above, the borrower had 10% in cash. Had he used the 80-10-10 program he could have avoided the PMI entirely by obtaining a second loan for the additional 10% of the home purchase price.

This second note will be at a higher rate, but will still save you money over PMI.
In the example above, the primary loan would have been for $72,000. At the same interest rate - 7.375% - the payment would have been $497.28. A second for the other $9,000 even at 10% interest, would have been only $79 - for a total of $576.28.  That borrower would have saved almost $54 per month.

Using an 80-20 program

Your first, or primary, real estate loan will be for 80% of the purchase price. Then, depending on factors such as your credit scores, you can borrow the full 20% on a second mortgage.

The second mortgage is often structured as a line of credit. This means that as you pay it back you are entitled to borrow against it again.

In the past, home sellers were allowed to carry this second, but that practice was abandoned. It's another one of those real estate regulations that had to change due to abuse.

Borrow against a cash asset

You can avoid high interest on the second mortgage by borrowing against an asset you own, such as a Certificate of Deposit. You may have the money you need, but would pay a stiff penalty for early withdrawal. Instead, consider a loan against it.

Your bank will often lend against a Certificate at a rate only slightly higher than the rate they are paying you. Given the current low yields on certificates of deposit, this could be a wise move, especially if you are planning to refinance within a few years.

You could also borrow against a life insurance policy, a vehicle, or another parcel of real estate.

Your Mouse House Mortgage Loan Consultant will help you determine which plan works best and is most beneficial to you.

Refinance to eliminate PMI

The second way to eliminate PMI is a little more expensive, because of added loan costs, but is still widely used. Once a home mortgage loan has "seasoned" for about a year, you will be allowed to refinance - as long as all mortgage payments have been made on time. If the house has appreciated significantly, or if you have been able to save extra money to put down, you can then get a new home loan at 80% loan to value and eliminate the PMI.

To decide if this is a smart move for you, divide the cost of a new loan by the monthly PMI payment and see how many months it will take to break even.  If you won't see the value for 26 months and you plan to sell in 12, then it's not a good idea. Of course, you also have to consider current interest rates compared to the interest rate you've locked into.

All lenders will drop the PMI once your loan balance has dropped to 80% of the original purchase price of the home. Unfortunately, during the early years of a loan, you aren't paying much on the principal, so it takes several years to repay 20%, or even 10%.

Refinancing your home mortgage loan is a smart tactic to use if you have purchased a home at a price significantly below market value. When you buy your home the lender limits the value to the home purchase price, even if the appraised value is much higher. At the time of refinance the home appraisal sets the value.