Recently a client approached me with an interest in financing the purchase of a home, but she absolutely did not want to pay mortgage insurance (MI). She was advised that in order to avoid MI, she would need a 20% down payment. She planned to put 10% down payment and borrow 10% HELOC (2nd Mortgage)
Let’s quantify the suggestion: date of comparison 7/5/22
Purchase price: $500,000. Credit score: 720
| Item | $Down payment | %Interest Rate | $Loan amount | $Monthly P&I | Total Payments after 5 years | Total payments after 10 years |
| 1 | 100000 | 5.32 | 400000 | 2226.19 | 133571 | 267143 |
| 2 | 50000* | 5.69 | 400000 | 2319.07 | 139,144.2 | 278,288.4 |
| 3 | 50000** | 6.5 | 50000 | 567.74 | 34,064.4 | 68,128.8 |
| 4 | 100000 *** | 450000 | 2886.81 | 173208 | 346417 | |
| 5 | 50000 | 5.25 | 450000 | 2582.42 | 154945 | 309890 |
- * 10% down payment from personal funds
- ** 10% down from HELOC at 6.5% interest fully payable in 10 yrs
- *** 10% down payment from personal funds plus 10% HELOC.
Item 1: 20% down payment, loan amount $400000, 5.32%, total P&I payment $2226.19/mo.
Item 2&3 (item 4): 20% down payment, loan amount $450000. Total P&I payment $2886.81 (no MI)
Item 5: 10% down payment, loan amount $450000, total P&I payment $2582.42 (includes MI)
What Can We Learn:
Mortgage rates have several variables, if a client makes a 20% down payment out of pocket, the client will qualify for a lower rate than if the client borrows a portion of that down payment, example: the rate difference between item 1 and 2 above.
Borrowing to avoid MI is a lot costlier than paying MI, example: monthly payment in item 4 vs item 5
The effects of compound interest greatly exaggerate any cost difference.
While MI is a necessary evil if the down payment is less than 20%, paying MI is much less costly than borrowing a 2nd (HELOC) to avoid MI. Also, MI can be removed by refinancing for conventional loans. In California where home prices are increasing at double digit rates, it is very possible that in 2 to 3 years the value of the home may appreciate such that the loan to value, (LTV) would be less than 80% in which case, a home-owner can eliminate MI by refinancing.
