Avoid Paying PMI on an Illinois, Wisconsin or Florida Mortgage
Whether purchasing or refinancing your home, you can build your equity
(i.e. pay down your mortgage) faster by NOT using a loan that requires private
mortgage insurance in the structure of your financing. This is best accomplished
with a "Piggy-Back" mortgage.
Private mortgage insurance (PMI) enables you to buy a home with less than
a 20 percent down payment. Likewise, it allows refinance loans with less than
20 percent equity in your home. Though PMI allows many people to obtain financing,
the added monthly cost can be significant. The portion of your monthly mortgage
payment attributed to PMI is like paying rent because paying this money benefits
someone other than you.
The Piggy-Back mortgage is simply an additional (2nd) mortgage that represents
any amount financed ABOVE the 80% Loan-To-Value level. A first mortgage is
written for 80% of the loan-to-value amount with the second mortgage written
for the remaining loan amount requested. This prevents the need for PMI. An
additional benefit is that ALL of your monthly payments go to the reduction
of principle (on your 2 loans) and may be tax-favored. PMI doesn't give any
tax advantages and the money paid for it simply vanishes every month.
How can you take advantage of this kind of financing structure? As an example:
a borrower who needs 95% financing on a property purchase (or refinance) can
have a first mortgage for 80% of the property's value, and a second mortgage
for 15% of the property's value. By doing this, there is no need for PMI because
the first mortgage loan does not exceed 80%. Mortgage payments on the two
separate loans go to the mortgage holders (banks)…NOT to a company that derives
profits from the PMI payments.
As an added benefit, this Piggy-Back loan can be structured as a Line of Credit
that can be paid down and re-used. You can pay it off/down at a pace you choose,
then you can access these funds again to make home improvements, fund education,
buy an automobile, consolidate debts, etc. You'll have no need to apply for
another loan for these needs. The caveat is that you must be disciplined enough
to pay more than the interest-only payments required for the loan in order
to create this "available" amount.
Alternatively, this second mortgage can be structured as a "closed-end" loan
with a fixed payment. This is for a fixed period of years (15, 20 or 30) with
equal payments being made over that period. This alternate is better for a
borrower who lacks the discipline to make larger payments on the Line of Credit
mentioned above.
As an example, a purchase price of $400,000 with a 5% down payment has a PMI
payment of $243 per month. By substituting this structure with a Piggy-Back
loan, the overall amount of mortgage payments is reduced by $171 per month.
The true benefit for this borrower is that by eliminating PMI, he will realize
an equity gain of $13,501 in 5 years. This will grow to over $31,000 in 10
years. This is a sizeable gain. As property value increases, it will further
enhance this borrower's net worth.
This much gain in equity would not be realized if PMI is included. The same
equity increase can also be achieved when refinancing. Piggy-Back mortgages
can work wonders when considered in your overall financial plans. Take a good
look at how you can benefit from this strategy…the answers may present life-changing
opportunities for you!
Additional Information on Piggy-Back Loans
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