Private mortgage insurance or “PMI” for short has traditionally been required on any mortgage where the loan to value exceeds 80%. However, in recent years new options have surfaced from lenders that give home buyers the option to avoid PMI. This option is commonly referred to as a “combo” or “piggyback” loan. Combo loans are simply two separate loans with the first limited to 80% of the home value. We will look at this in more detail below.
Let’s take the 95% financing Jumbo program for this example. The 5.0% down jumbo loan will actually be two loans. The first loan is at 80% of the sales price, the same amount as if the buyers made a 20% down payment. There is also a second loan that bridges the gap between 20% down and the 5.0% down payment, or 15% of the sales price.
Assume the purchase price of the home is $1.0 mil, the buyers make a down payment of just $50,000, plus closing costs. There is a new first mortgage at $800,000 and a second lien at $150,000. With this structure, the buyers can avoid paying costly PMI. Similar structures can be placed for buyers putting down 10% or 15%.
Note, the second mortgage will typically have slightly higher interest rates than the first mortgage as second lien lenders assume greater risk compared to first lein holders. However, the larger first mortgage rates are often less if the LTV stays at 80% or lower. In addition, there is no mortgage insurance payments each month.
There are multiple options when financing a higher-end home and each situation can be different based on the loan amount, property state, credit, etc. While there may not be as many choices compared to conventional mortgages at or below the local conforming loan limit there are more than you might realize. If you are considering purchasing a home with less than 20% down payment, contact us to learn about all the purchase and refinance options.
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