The idea of a home buyer doing two loans to finance a home purchase is gaining popularity nationally. It’s natural to have some reservations about the idea considering the housing crisis about 10 years ago, but back then buyers were able to use two loans to finance 100 percent of the home’s value. That just isn’t the case today. In fact, buyers can borrow more equity doing one loan than they can when using two loans, so they still need to put 10 percent down at closing and can finance up to 90 percent of the price.
Without further ado, let’s unpack when using two loans make sense.
Avoiding private mortgage insurance (PMI)
Mortgage insurance is required on conforming and jumbo loans when a buyer puts less than 20 percent down at closing. In some cases, that PMI can get expensive, and doing two loans can help to avoid PMI. If a buyer chooses to do this, the first loan would most likely be for 80 percent of the price with the second loan being up to 10 percent for a total of 90 percent.
Example: Purchase price: $400,000
Loan #1: $320,000 (80% of $400,000)
Loan #2: $40,000 (10% of $400,000)
Avoiding jumbo mortgage rates
Jumbo loans start at around $450,000, and rates are typically about .25 to .5 percent higher than conforming rates. For a jumbo buyer to avoid PMI, the 20 percent down payment can be hefty and potentially challenging. This is when doing a second loan can help. In this scenario, a buyer could finance up to the conforming loan limit and add a second loan behind it.
Example: Purchase price: $700,000
Loan #1: $453,100 (65% of $700,000)
Loan #2: $176,900 (25% of $700,000)
This example still maintains a 10 percent equity position required to be put down at closing and it maintains conforming rates on the first loan.
Create the ability to reuse equity
Second loans can be in the form of a fixed-end installment loan. This is a traditional loan where a balance is borrowed and repaid over an amortized schedule. They can also be in the form of a home-equity line-of-credit. This is more of a credit card collateralized by the house and as you pay down the balance, the credit limit can be reused for another purpose. This can be useful in the future for things like home improvements, education expenses, or debt consolidation.
Loan options and scenarios are truly endless, so it’s important to talk to an experienced mortgage professional. The advice is always free, so please reach out if you’d like to explore your options. We’re happy to help!
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This weekly Sponsored Column is written by Mike Miles of Fountain Mortgage. Located in Prairie Village, Fountain Mortgage is dedicated to educating, and thus empowering, clients to make the best financial decision possible for their situation. Contact Fountain today.
Mike Miles NMLS ID: 265927; Fountain Mortgage NMLS: 1138268