2nd Mortgage to Avoid Mortgage Insurance

Many borrowers consider taking a 2nd mortgage to avoid paying premiums for mortgage insurance. Mortgage insurance is required if you make a down payment of less than twenty percent. A 2nd mortgage can be used to make a high down payment when you don’t have the cash at hand to make the high down payment on your own.

Whether you take a 2nd mortgage or opt to pay mortgage insurance premiums, you will still be making an extra payment each month. Since this is the case, you may be asking yourself why anyone would choose a 2nd mortgage rather than simply opting for mortgage insurance. The primary answer has to do with the tax consequences of each payment. Interest payments for a 2nd mortgage are tax deductible, while insurance premiums are not.

However, this isn’t the end of the story. There are several other factors that can influence the decision on whether to get a 2nd mortgage or pay for insurance. One of these is the difference in rate between the first and 2nd mortgage. Generally, 2nd mortgages have a higher rate, so the closer they are, the better deal you are getting.

You should also consider the term of the 2nd mortgage. Because 2nd mortgages have a higher rate, you will save a lot of money if you get a 2nd mortgage with a shorter term. The combination of two loans will be more advantageous if the second loan pays off faster than the first.

It is also important to seriously consider your options when choosing between a 2nd mortgage and mortgage insurance within your tax bracket. Because the 2nd mortgage offers a major tax break, your tax status is a key component of your decision. If you are in a high bracket, you stand to save much more money from the decision to take a 2nd mortgage.

These are just some of the factors borrowers consider in choosing whether to pay for mortgage insurance or get a 2nd mortgage. More factors that deserve consideration are listed elsewhere on this site.