Real Estate and Home Mortgages - 80/10/10 first timer or PMI
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bogey
05-01-07, 07:17 PM
My son and his wife are first time home buyers looking at a home in the $250,000 - $260,000 range and will probably have a down payment around $35000. They were told that they could avoid mortgage insurance if they go for an 80/10/10 loan. I am not exactly sure what that means and wonder if it is in fact a viable option - or if they should go conventional and pay the mortgage insurance
DIYaddict
05-02-07, 02:01 PM
An 80/10/10 *IS* a Conventional loan. Here's the breakdown based on a $260,000.00 sales price:
80 - 80% 1st TD = $208,000.00 loan amount
10 - 10% 2nd TD =$26,000.00 loan amount
10 - 10% down payment ($26,000.00)
So instead of just 1 loan WITH PMI, they can get a 2nd TD and put only 10% down ($26,000.00) and apply the left over towards closing costs/prepaids.
If they are were told what you mentioned by a Lender/Broker, the Lender/Broker should be able to give them a break down of the different scenarios. Ask them to ask and get a full explanation of things they don't understand. Good thing to do is compare what the rates/payments would be for both scenarios and what fits best for them.
80 - 80% 1st TD = $208,000.00 loan amount
10 - 10% 2nd TD =$26,000.00 loan amount
10 - 10% down payment ($26,000.00)
So instead of just 1 loan WITH PMI, they can get a 2nd TD and put only 10% down ($26,000.00) and apply the left over towards closing costs/prepaids.
If they are were told what you mentioned by a Lender/Broker, the Lender/Broker should be able to give them a break down of the different scenarios. Ask them to ask and get a full explanation of things they don't understand. Good thing to do is compare what the rates/payments would be for both scenarios and what fits best for them.
ilmooz
05-02-07, 02:13 PM
One thing to keep in mind is that the 10% loan often comes with a higher interest rate than the one given on the 80% loan. I considered the same scenario when I financed my home until I found that out. Ultimately I waited until I had 20% down, lowered my monthly payment, and didn't have to pay PMI or a higher interest rate.
DavePearson
05-02-07, 03:15 PM
Our first home was an 80/10/10 (this was back in 2000). Our 1st mortgage was around 7%, our second was about 10%. Because we always prefer to pay down the debt, we concentrated on getting rid of the second.
The ONLY advantage to this is you can't deduct PMI, you can deduct 2nd interest. The deduction is only valid if your total itemized deductions is greater than the standard deduction on taxes.
(side bar) This means, when one is told that a 6% mortgage ends up being only 4% because of the deduction, they are being fed a great line, it only helps if all the standard deductions total more than the standard deduction (is it about 9K now?). In other words, if you would pay 10K in interest (based on the 9K standard deduction), there is only a 1K times your tax rate benefit, NOT 10K times your tax rate.
The ONLY advantage to this is you can't deduct PMI, you can deduct 2nd interest. The deduction is only valid if your total itemized deductions is greater than the standard deduction on taxes.
(side bar) This means, when one is told that a 6% mortgage ends up being only 4% because of the deduction, they are being fed a great line, it only helps if all the standard deductions total more than the standard deduction (is it about 9K now?). In other words, if you would pay 10K in interest (based on the 9K standard deduction), there is only a 1K times your tax rate benefit, NOT 10K times your tax rate.
Family Guy
05-03-07, 09:34 AM
"One thing to keep in mind is that the 10% loan often comes with a higher interest rate than the one given on the 80% loan. I considered the same scenario when I financed my home until I found that out. Ultimately I waited until I had 20% down, lowered my monthly payment, and didn't have to pay PMI or a higher interest rate."
This is true, the 2nd will have a higher rate due to the nature of the loan.
However, the payment is often still lower than a single loan with PMI. The idea is to pay higher interest instead of PMI, since until this year PMI was not tax deductible (it is now for new loans in 2007, within income limits).
Saving up more money to put down is always an option, however you could also buy the house and pay down the 2nd quickly to get rid of it. That's a personal decision. To most, it's worth it to buy the home, unless saving up that extra 10% is quickly and easily done (it's not, for most). Home ownership is worth it to most people. Saving is always a good thing but not something that most will want to consider. Not many buyers put down 20% on their first home. In fact, most don't put down even 10%.
This is true, the 2nd will have a higher rate due to the nature of the loan.
However, the payment is often still lower than a single loan with PMI. The idea is to pay higher interest instead of PMI, since until this year PMI was not tax deductible (it is now for new loans in 2007, within income limits).
Saving up more money to put down is always an option, however you could also buy the house and pay down the 2nd quickly to get rid of it. That's a personal decision. To most, it's worth it to buy the home, unless saving up that extra 10% is quickly and easily done (it's not, for most). Home ownership is worth it to most people. Saving is always a good thing but not something that most will want to consider. Not many buyers put down 20% on their first home. In fact, most don't put down even 10%.