Two Loans Better Than One?

In some cases, borrowers may find it advantageous to take two mortgages out at the beginning. This stems from the fact that a down payment of twenty percent eliminates the need for mortgage insurance. Borrowers who cannot afford to put down twenty percent on their own might want to use a second mortgage to borrow enough to meet this requirement. This effectively trades monthly payments for the second loan for mortgage insurance premiums.

Whether or not this arrangement will help you come out ahead in the long run depends on several factors. The first is the difference in interest rates between the two mortgages. Second mortgages always carry a higher rate than the first, but the closer the rate of the two loans, the bigger the advantage. Similarly, the shorter the term of the second mortgage is, the better off you are. Because it is at a higher interest rate, you would like the second mortgage to pay off quickly relative to the first.

Another consideration is your tax bracket. Second mortgage interest is deductible, while mortgage insurance payments are not. The write-off is more advantageous to those borrowers who are in a higher tax bracket. Closing costs could also play a part, depending on whether the loans are from the same lender. If they aren’t, closing costs for the second loan will add to the total amount.

The final factor to consider is how fast you expect your home to appreciate. When your loan balance reaches eighty percent or less of the appraised value of your home, you are allowed to terminate your mortgage insurance. If you think the property you are purchasing will appreciate quickly, the combination loan will be less attractive.

In the end, taking on a second mortgage to avoid mortgage insurance premiums is most advantageous to those in higher tax brackets. Since both require payments, the deductibility of mortgage interest is what makes the combination loan worthwhile for some.