| Ask Dr. Don
Today, Dr. Don explains private
mortgage insurance and ways to have it waived, and discusses the
mortgage programs available to first-time home buyers.
Dear Dr. Don,
We are trying to decide if we should take an 80-10-10 mortgage or
put down 10 percent and pay the private mortgage insurance on a
single mortgage. The 80-10-10 loans cost more monthly but all money
goes toward principal and interest. The second mortgage's terms
(15/30 balloon) seem rather expensive. After 15 years of payments,
only a small amount of the principal is reduced. The $15,100 loan
amount will only be reduced to about $12,000 and must then be paid
in full or refinanced after the 15 years. It seems like a lot of
interest expense to pay to avoid the PMI insurance. Is this the
best route to take? I do understand that all the interest is tax-deductible,
As an aid to uninitiated readers, the mortgage
definitions page on this site defines an 80-10-10 loan as, "A
combination of an 80 percent loan-to-value first
mortgage, a 10 percent down
payment and a 10 percent home equity
loan. It would eliminate the need for private
mortgage insurance, and for expensive homes it could eliminate
the need for a jumbo
mortgage by reducing the first mortgage to the conventional
$252,700 limit ($379,050 in Alaska and Hawaii)."
There are many decision variables to consider.
You can get the private mortgage insurance, or PMI, waived once
you have reached 78 percent to 80 percent loan-to-value on the house,
and a dollar of appreciation can be as valuable as a dollar
of principal repayment in reaching that valuation. The interest
expense associated with the second mortgage generates a tax deduction,
while the PMI payments do not. Your after-tax cost of debt should
be less for the single mortgage than it is for the first and second
Let's say you are buying your house for $151,000.
With a 90 percent loan-to-value mortgage, you put $15,100 down and
borrow $135,900. If housing prices increase by 5 percent a year,
your house could appraise at $174,800 in just three years. Ignoring
any principal repayment from your mortgage payments, you are already
at 78 percent loan-to-value. To calculate the appraised value needed
to drop coverage, just divide your loan balance by 80 percent. This
is an aggressive approach to canceling PMI and for this approach
to work your lender has to accept the appraised value of the property.
You can learn more about this approach on pmirescue's Web
Larson wrote an article for Bankrate.com on this topic, and
it discusses the issues associated with the two approaches that
you are considering. Use the table in the article as a framework
for analyzing which approach is better for you. With a balloon mortgage
as the second mortgage, and the higher payments for the 80/10/10
approach, I'd lean toward the single mortgage, especially if you
think your lender will work with you when you look to cancel the
PMI early from home appreciation vs. loan paydown.
First-time home buyer
I've heard about government programs where I can get a
below market interest rate because I'm a first-time home buyer.
Is this true? Where do I find more information about this? I heard
the interest rate was about 4 percent. Please let me know because
we are closing on our home soon and I would like to take advantage
of this program.
Your state or local Housing Finance Agency will be able
to tell you what programs are available in your area. I found mine
by looking in the government section of the telephone book. Many
first-time home buyer programs are targeted to low- and moderate-income
families. First-time home buyer programs can be credit guarantees
or reduced interest rate programs. The HFA issues tax-exempt bonds
to provide below-market interest rate mortgages. Four percent mortgages
wouldn't cover the cost of the tax-exempt financing, so I wouldn't
hang your hat on getting that rate. Income restrictions or targeted
lending areas may limit your ability to use your HFA's programs.
Mae's Web site has a page that discusses the reduced rate lending
programs. You also may want to check out this site's story on targeted home loans.
Bankrate.com writers base
their answers on our editorial content and advice of financial professionals.
We make no claims or representations about the accuracy, timeliness or completeness
of such content, advice or the answers provided to you. Our content, advice
and answers are intended only to assist you with your financial decisions. However,
by its nature such information is broad in scope. Your financial situation is
unique, and our content, advice and answers may not be appropriate for your
situation. Accordingly, we recommend that you get different opinions and seek
the advice of your accountant and other financial advisers before making any
final decisions or implementing any financial or investment strategy.
-- Posted: March 15, 2000