Which is better? - mortgage ques

80/10/10 or Upfront PMI ?

I understand that interest on the piggy back loan is tax deductable and PMI is not.

Piggy back loan of 25K at 9% (2.5% above prime) over 5 years , when you may pay it off realistically, is around 8500.

PMI for that same loan, paid upfront is around 5000. Any tax benefit you derive per year, at around 3K a year (actually it will be more the first year and then decrease), will only be around a few hundred dollars at best - depending on tax situation. Subtracting 5 times that, (for 5 years) gives a number of around 2K savings.
You save atleast 1000 $ if you pay it up front.

This assumes that you pay off the loan in 5 years, realistically, you may not pay it off for 10 years, plus you have to do
accounting for the second loan at the higher rate (from a money management perspective).

With upfront PMI the entire loan is at the lower rate, (6.5 currently), so you are saving on interest payments as well.

I am thinking upfront PMI is better but I think most people prefer the piggybacks.

Message edited 8/2/2006 11:08:05 AM.

Re: Which is better? - mortgage ques

IMO, that loan rate (prime + 2.5) sounds HIGH! can you get another estimate?

I wouldn't pay PMI, espcially since the market has slowed down quite a bit and you may not build equity at the rate that it has been in the past 5 yrs.

Re: Which is better? - mortgage ques

it sounds like you want to go with the PMI, so do that!

I would go for the piggy back - i agree - that quote of prime +2.5% sounds high

Message edited 8/2/2006 11:10:49 AM.

Re: Which is better? - mortgage ques

On small loans of about $25K that is about right for the second loan. The smaller the loan the higher the interest rate. I bet if your second loan was $50K the rate would be around 8.25%.

If you are sure you can't pay off the other loan in 5 years, then paying PMI makes sense.

It's also not that easy to get rid of the PMI even if you have built up 20% equity. The mortgage companies are not just quick to do that. You could end up paying PMI longer than you think.

Message edited 8/2/2006 11:39:25 AM.

Re: Which is better? - mortgage ques

We just had to figure out something similar. We were weighing different mortgages against each other, as well as keeping the current mortgage and getting a home equity loan. What I did is figure out how much it would cost me if I paid just as I had to and nothing more. I figured in closing costs as well, and got the total. Then I compared the monthly cost to see which was most affordable. We didn't choose the one that was the lowest total because we felt it was too high monthly. And we didn't choose the lowest monthly either. We weighed the benefits and made the decision, hoping to pay extra to pay it off early. But if we don't, that's okay too.

I know it's difficult to remove PMI once you have 20% equity, so that might also factor into your decision.