Should I get two mortgages to avoid paying PMI? Yes and No
Posted on October 13, 2007
Filed Under Home Finances |
The question seems clear - “Should I finance/refinance my home with 2 mortgages in order to avoid having to pay for Private Mortgage Insurance (PMI)?” I say yes, while Dave Ramsey says no. Obviously the answer is not as clear as the question. So let’s take a look to see what the best answer is. Fortunately it might not be very complicated after all…
In my personal experience, several times I have successfully financed and refinanced with two mortgages [at a time, versus just one] to avoid having to pay PMI. So, why does Dave always say never to do it? Recently I heard him explain his viewpoint and it helped me see where he was coming from.
Simply put, he said that the interest rate on a second mortgage is typically so unfavorable that it would be cheaper to pay the PMI for as long as it takes to reach the loan-to-value ratio (LTV) where PMI is no longer required (usually where the appraised value of the home is at least 80% of the amount of the loan), than to suffer the interest rate - especially if it is a variable rate loan.
So, Dave and I agree at least in opposing variable rates. However, in my case, my second mortgages were never variable. Granted their rates were just a little higher (like half a percentage point), but I calculated that the minor elevation in the rate would still be cheaper than paying the PMI - in both the long term and the short.
When it comes right down to it, I take a very simple approach, and I ask “what is going to be the total cost of my decision over the life of the loan?” Using one of the handy free online mortgage calculators in the LoanQuotes.com Resource Center, you can calculate and compare your various loan options and see what the cost is over the 20 or 30 year loans you are considering will be. If you have a lower rate but pay PMI for x? years, how much do you think it will cost. Or, if you pay a little higher rate on a second mortgage but pay no PMI for x? years, then how much will that cost? And to the point of the latter, remember that neither Dave nor I are fans of variable rate mortgages, so I say avoid the variable rates if you have to choose between them and the PMI.
All the best!
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