Alternatives to Mortgage Insurance

If you are not able to make a twenty-percent down payment on your property, there are alternatives to purchasing insurance coverage in order to gain approval for your loan. One of the most common alternatives is a second mortgage, commonly referred to as a piggyback loan.

For example, if you pay ten percent of your property’s value as a down payment, you can take out a mortgage for ten percent of your property’s value and a second mortgage for the remaining ten percent of the cost of your home. However, you will not have as many options regarding the type of second mortgage as you will have for the first. First mortgages can have either fixed interest rates or adjustable interest rates that can change within a certain range each year. Most second mortgages are available only as adjustable-rate loans, so your interest rates are likely to increase the second and third years you have your second mortgage. Additionally, interest rates on second mortgages are usually higher initially than interest rates on first mortgages. If you are debating the cost of purchasing insurance or taking out a second mortgage on your property, plan for the interest rate on your second mortgage to increase. Calculate how much interest you will pay on the second mortgage and compare this to what your mortgage insurance premiums are likely to cost.

A second mortgage also means that you will have to make two mortgage payments each month. Make sure to budget for this to determine if this type of insurance is more affordable than a second mortgage, while keeping in mind your second mortgage payments will help you gain equity in your property while mortgage insurance will not.

Closing costs on second mortgages must be paid up front, just as with first mortgages. This means that when you close on your property, you will have to pay the closing costs for both mortgages.

One situation where a second mortgage could be a better option than insurance is if you only plan to stay in your home for a short period of time. If you are going to move in several years, you should be able to pay off both mortgages when you sell your property and avoid increasingly expensive interest payments on a second mortgage.

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