More Factors for 2nd Mortgage v. Insurance

Many borrowers consider a 2nd mortgage when they are purchasing a home and don’t have enough cash to make a large down payment. In this case, mortgage insurance is generally required. However, a 2nd mortgage can eliminate the need for mortgage insurance, and save some borrowers money.

When making this decision, the primary concern for most borrowers is tax consequences, since interest payments on a mortgage are tax deductible.

Borrowers also consider the interest rate and term of the 2nd mortgage, as well as the borrower’s tax bracket. Note: These concerns are discussed in more detail elsewhere on this site. In addition to these concerns, there are even more factors that borrowers should take into account when making a decision on this type of 2nd mortgage.

One of these additional factors is closing costs. The importance of these costs will depend on whether your 2nd mortgage is from the same lender as the first. If both loans are from the same lender, the 2nd loan won’t incur any additional closing costs. However, if your 2nd mortgage is from a different lender, you’ll need to factor the additional closing costs into your final decision.

Another additional factor is the expected rate of appreciation for the home you are purchasing. This factor is important because you are allowed to terminate your mortgage insurance when the balance of your loan is less than 80 percent of the appreciated value of your home. That means that if your home appreciates quickly, you won’t have to pay mortgage insurance very long, and the 2nd mortgage option will become less attractive.

You should also consider how long you expect to remain in the home. If you don’t plan to stay long-term, extra up-front costs may not be worth it. Also, the rate of return you will be earning on the money you save from one option or the other could be a factor in determining which one you choose.

In the end, all these factors are important in determining whether a 2nd mortgage or insurance premiums would be more advantageous to you.