Making a Smaller Down Payment Go Further

Making a Smaller Down Payment Go Further

One of the primary challenges borrowers face when buying a home is deciding how much money to put down. In nearly all cases, the more you put down, the better off you will be. However, many potential homeowners do not want to wait until they have saved 20% in order to move into their dream home. That’s where we come in. Borrowers who are searching for a new mortgage and only have ten percent down can still take advantage of low rates and avoid paying costly mortgage insurance.

Another alternative to borrowers

Borrowers who have saved only ten percent of their purchase price typically understand they are going to need mortgage insurance. Unfortunately, this can mean an additional monthly payment on their mortgage which can be onerous over the life of their loan.  Keep in mind, mortgage guidelines state that a lender may force mortgage insurance on borrowers who have less than 20% equity for their home purchase. However, by taking two mortgages, one for 80 percent and one for 10%, you can still finance 90% of your purchase price without the burden of mortgage insurance.  This program is available for all qualified buyers.

How does the 80/10 work?

Let’s review what we were able to accomplish for one client recently:

Real Scenario from June 2014

  90% mortgage 80% first/10% second
Purchase price $514,900 $514,900
First mortgage $463,410 $411,920
Rate on first 4.5% 4.5%
Principal and Interest $2,348 $2,087
PMI payment $363 $0
Second mortgage $51,940
Rate on second 5.25%
Interest only payment $227
Monthly payment $2,711 $2,314
Total Saved $397

 

Why is the difference so significant?

Simply put, by not having to pay monthly PMI and obtaining a second mortgage which is interest only, borrowers can realize a significant savings.  The second mortgage requires only monthly interest payments for the initial term of the loan, which is ten years then it converts to a 20-year mortgage. At that time, you will be obligated to pay principal and interest on the balance of the second mortgage.

What happens after ten years?

When the ten year note comes due, borrowers have a couple of options available to them including:

  • Do nothing – since the mortgage will convert to a 20-year mortgage at this point, the borrower has the option to do nothing at all and enjoy a 20-year fixed rate.
  • Payment in full –  borrowers can elect to pay the entire balance of the second mortgage (in this case, $51,940) plus accrued interest in cash which will allow them to enjoy more equity in their home.
  • Refinance –  If interest rates warrant a change, borrowers will be able to refinance their home and pay off the second mortgage. This is optional of course since the mortgage converts to a 20-year fixed rate after the interest only period of 10 years.

Are there drawbacks?

There are risks borrowers must be aware of when using this type of financing. First, interest rates may be significantly higher in ten years. However, keep in mind that since a borrower is saving nearly $400 a month, this money can be saved to pay off the second mortgage in full at the time of maturity.

The 80/10 option is a good option for any borrower who wishes to save money every month and avoiding paying for mortgage insurance. Borrowers can still put down only 10% on their dream home and still save significant money.

 

Even with only 10% down, you can still avoid costly mortgage insurance payments. Ask us today about how to qualify for an 80/10 mortgage and save hundreds of dollars a month on your mortgage payments

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