2nd Mortgage Calculator

As evidenced by the many factors that go into deciding whether to take out one loan and pay mortgage insurance premiums or rely on a 2nd mortgage, the calculations on the subject are not easy. Online calculators can be helpful in determining which decision makes more sense for you.

Calculators pull together all the factors that affect such a decision, and some even show you the “break-even rate.” This rate is defined as the largest rate it would make sense to pay on your 2nd mortgage. If you can get a 2nd mortgage below this hypothetical rate, it would give you an advantage over paying mortgage insurance.

Here is an example of the calculations. We begin with a hypothetical borrower who is purchasing a house for $200,000. This borrower plans to remain in the house for five years, and earns a return of five percent on her investments.

In this example, the borrower is in the highest income tax bracket 39.6 percent at the time. The property she is planning to purchase is only expected to appreciate one and a quarter percent. Her choices are between one mortgage that is for $180,000 (she is putting ten percent down) and eight and a quarter percent interest.

This loan has zero points, has a term of thirty years, and will require mortgage insurance equal to .52 percent. Her other option is a similar loan, but for $160,000, with a 2nd mortgage for $20,000 at a rate of 11.75 percent, and no points.

The loans are from the same lender, so closing costs are the same. Putting all this into a calculator will let you know that the break-even rate is 20.29 percent, well over the 2nd mortgage’s rate. For this borrower, a 2nd mortgage is a no-brainer.

Another quick example will show how changing factors can easily change results. If everything is the same as the first example, with the exception of a borrower in the 15 percent tax bracket, the break-even rate will drop to 16.97 percent. If we also change the example to have the borrower’s first mortgage a 15-year mortgage, the break-even rate falls even further, to 11.38 percent.

These numbers illustrate how slight changes in a borrower’s situation can change whether the decision to take a 2nd mortgage is advantageous or not. That is why calculators are so useful in helping borrowers make a determination in this area.