Using a Second to Avoid Mortgage Insurance

Yes, you can avoid it and take some tax advantage of the combination loan, but this all would depend on following factors:

First, check the interest rate on the second mortgage relative to the rate on the first. Remember, the smaller the difference in rate between the two mortgages, the greater the advantage of the combination relative to the single loan.

Second and most importantly, check the term on the second mortgage against the term on the first — Shorter term loans pay down the balance faster than longer term loans. Since the second mortgage has a higher rate than the first, the faster the second is paid off relative to the first, the greater the advantage of the combination compared to the single loan.

Why check on your tax bracket? Because the combination loan enjoys a larger tax write-off, the combination is most advantageous for borrowers in the highest tax bracket.

Find out the closing costs. With one loan closing, closing costs should be the same for one loan or two. But if the second mortgage is from a different lender and requires a separate closing, the combination will have higher closing costs.

What appreciation rate can you expect? Borrowers can request that their mortgage insurance be terminated when the loan balance reaches 80% of the home’s appreciated value. This means that the higher the expected appreciation rate, the less the advantage of the combination.

Remaining factors are like how long you expect to remain in the home and the rate of return you can earn on investments also affects how your choices shape up.

The combination loans are least attractive to low tax bracket borrowers who take out short-term first mortgages, expect early termination of mortgage insurance, and face additional closing costs on combination loans.


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