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80/10/10 or PMI

4,074 Views | 18 Replies | Last: 6 yr ago by AnalogyAg
AustinCountyAg
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Currently have a contact on a house and can't decide which way to go. Price difference per month is only about $26 more expensive going the PMI route..... but closing cost is about $700 more expensive going with the 80/10/10.

I am on the fence about which way to go. The house is in the best part of town and will no doubt increase in value over time.

not sure if this will be a 5 yr kind of house or a longer. The location is very hard to beat.

Any tips or advice? Everyone says to avoid PMI but having those two loans in the 80/10/10 somewhat worries knowing the extra has to be paid each month on the second loan in order to pay it off
aggiepaintrain
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AG
Not sure PMI is tax deductible, interest on the 10 is (assuming you itemize), to get PMI removed you have to usually pay for an appraisal.

Do the 80/10/10.
AustinCountyAg
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The pmi is not tax deductible.

I'm torn because the pmi is not that much (60 bucks) and the difference in monthly payment minimum between the two types of loans is only $26. Not to mention the 80/10/10 will be about seven hundred more in regards to closing costs.

I'm scared we will not allocate the funds to pay off the second tier loan and have it balloon. Just by putting it off due to "life"
JSKolache
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AG
AustinCountyAg said:

Currently have a contact on a house and can't decide which way to go. Price difference per month is only about $26 more expensive going the PMI route..... but closing cost is about $700 more expensive going with the 80/10/10.

I am on the fence about which way to go. The house is in the best part of town and will no doubt increase in value over time.

not sure if this will be a 5 yr kind of house or a longer. The location is very hard to beat.

Any tips or advice? Everyone says to avoid PMI but having those two loans in the 80/10/10 somewhat worries knowing the extra has to be paid each month on the second loan in order to pay it off
Same situation. I went PMI because I didn't like the idea of a 2nd lien on the place, & I got a better rate with PMI vs 10/10.
gig em 02
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AustinCountyAg said:

The pmi is not tax deductible.

I'm torn because the pmi is not that much (60 bucks) and the difference in monthly payment minimum between the two types of loans is only $26. Not to mention the 80/10/10 will be about seven hundred more in regards to closing costs.

I'm scared we will not allocate the funds to pay off the second tier loan and have it balloon. Just by putting it off due to "life"


The goal is to refinance out of the extra 10% before the balloon, hopefully with what you pay off and appreciation you will be well over 20% equity
AustinCountyAg
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gig em 02 said:

AustinCountyAg said:

The pmi is not tax deductible.

I'm torn because the pmi is not that much (60 bucks) and the difference in monthly payment minimum between the two types of loans is only $26. Not to mention the 80/10/10 will be about seven hundred more in regards to closing costs.

I'm scared we will not allocate the funds to pay off the second tier loan and have it balloon. Just by putting it off due to "life"


The goal is to refinance out of the extra 10% before the balloon, hopefully with what you pay off and appreciation you will be well over 20% equity


Can you break that down for me a little easier to understand?
aggiepaintrain
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AG
PMI builds no equity, paying on the 2nd does.

AustinCountyAg
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But since I'm only paying a difference of $26 more with pmi wouldn't I be losing money if you factor in the interest rates on the piggyback loan over time?....and the fact that pmi should only last several years at most?
gig em 02
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If there is a 10 year balloon, that doesn't mean you write a big check in year 10, it means that you refinance in year 8 or 9. Ideally by that time your equity will exceed 20% of the value at the time it is refinanced.

Balloon payments just mean you need a new loan, not that you need to make a huge pay off.

One of the pros can probably explain it better than I can
AustinCountyAg
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aggiepaintrain said:

PMI builds no equity, paying on the 2nd does.




I get PMI does nothing for equity, but can't the same be said on a piggyback loan if you only pay the minimum monthly amount on your second lien? Isn't that basically just covering interest on it?
AustinCountyAg
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Jay@AgsReward.com
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AG
The trouble with assuming you are going to refinance to get out of a balloon on the second lien is that you never know where interest rates will be in a few months much less 9 years from now. Would you really want to refinance your 4.00% 30 year fixed rate you might get today for 7.5% (or whatever) 9 years from now?

That all being said, most second lien balloons (which you do not have to take a balloon, there are fixed second lien options) do not balloon until 15 years. The loans are typically relatively small and the rates are higher, so it makes sense that most people pay extra if they pay extra on anything on that second lien. The reality is that most folks do not own a house for more then 15 years. Especially first time home buyers. Life happens.

When going over the pros and cons with my borrowers of Mortgage insurance, second lien or even lender paid mortgage insurance I always ask how long they think they will own the house. That usually helps with the decision.
BigPuma
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AG
It actually is deductible if you are poor. Congrats on not being a poor.
AnalogyAg
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if you have a really good 30 yr interest rate, go with the PMI so you can have that as a viable option for next few decades, Especially given your comment about being uncertain about making the jr lien payment.

you can probably get out of the PMI by yr 5 or 10 at latest. might cost you a couple grand mire difference over that time, but you might be money ahead if int rates go up as most expect. and its less hassle. and you seem predisposed to this course anyway.

as Jay says, this is presuming you want to keep house long term.
aggiepaintrain
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AG
not all 2nd liens are balloons
Harkrider 93
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AG
I went with the 80/10/10 and paid off the 10 quickly. If you can't pay off the 10 quickly, then that is a good sign you may be buying more than you can afford.
Ragoo
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AG
Harkrider 93 said:

I went with the 80/10/10 and paid off the 10 quickly. If you can't pay off the 10 quickly, then that is a good sign you may be buying more than you can afford.
another good sign might be not being able to save for a 20% down payment.
jefe95
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AG
PMI is paying the banks insurance. I avoid it like the plague.

Also with an 80/10/10 you avoid escrow. So you can keep your taxes and insurance in your bank account. I've seen banks require a healthy minimum in the escrow account that gets added to your monthly after the first year.
SteveBott
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AG
PMI by the numbers. I will use 250K sales price. Several factors that are individual to the borrower. The main variable is credit score. Both the first loan and PMI is depended on your score. We take the middle score of the three main bureaus and the lower of these two if there is co-borrowers. Higher the score better the rates.

Second liens are also subject to credit score and you must have 680 or better to qualify. But its much simpler math:

700 plus = 4.99% 15 year term
680-699 = 5.5% 15 year term

Now if you want a lower payment based on the 30 year payback you get a 15 with a balloon and add .25% jjto the rate above.

Now for the first loan you also have a fee to Fannie to use the second lien, 1.0% of the loan so above is 2000 dollars. I usually roll that into the rate of the first so your cost is having 4.0% loan on the 80% first versus 4.25% on that first loan. You could pay the fee in closing costs but no one opts for that.

4.0 rate is 1074 per month. 4.25 rate 1106 or 32 dollars per month and 384 per year in extra costs. Then you pay an additional 500-700 admin fee in closing for the second lien lenders.

Back to PMI. If your credit score is 750 then your payment is 76 per month. If 680 your payment is 136 per month or 60 per month.

You can calculate PMI here but be advised you need an accurate middle credit score to input in the system

https://www.mgic.com/rates/ratefinder

So the final variable is how bullish is the market you are buying in. If like Dallas, Austin etc you could gain 12% equity in short order, say 2 years. So absorbing the PMI at 750 score, 24 months is 1824 and offset on the lower interest rate of 4.0 saving 768 and net cost for PMI is 1056 plus second appraisal of 500 so final cost is 1556.

with the second lien you are accepting the 32 per month extra on the first lien until you sell or refinance and also incur 1.0-1.5% more on your money on the second until you refi or sell.

Bottom line, there is no simple answer to the question. The only solution that is correct is based on your unique file and circumstances. I always send to my clients a side by side closing estimate so they can compare the two options and make a decision for them. It is usually easy decision when the client can see both options.


AnalogyAg
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Curious, AustinCounty, which way you went, and
why.
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