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Private Mortgage Insurance or HELOC?
I live in one of those states where many first time homebuyers in the last eight years have purchased without having a downpayment of 20%.
Six-eight years ago, some borrowers had private mortgage insurance placed on their mortgages, at a rate varying with the amount mortgaged.
The borrower has the right to request cancellation of PMI when she pays down her mortgage to the point that it equals 80 percent of the original purchase price or appraised value of her home at the time the loan was obtained, whichever is less.
A Home equity line of credit (HELOC) tied to a first mortgage is usually a balloon loan due in 15 years, with a rate higher than the 30-year mortgage.
When I was looking at new purchasers' deeds of trust, it seemed that they all had HELOCs rather than PMI. I'm trying to work out the math. New borrowers go for HELOCs to avoid PMI, but is it a better deal for them?
$200,000 house
$27,000 downpayment
30-year fixed rate: 6%
House Appreciation rate: 3% (yes. historically this is accurate, it's not 23% as a recent homebuyer in San Diego, Phoenix, Las Vegas or Naples-FL might think)
Marginal tax rate bracket: 25%
Borrower A goes for PMI:
$60.55/month added to mortgage
Borrower B goes for HELOC
15-year rate: 6.75% on $13,000
$73.125/month added to mortgage
Twenty-four months of mortgage payments elapse, and Borrower A has prepaid the mortgage, plus has $400 extra to pay an appraiser to say the magic words "Meccaleccahineccahineyho! The house has appreciated enough for you to achieve loan-to-value ratio. Long live Jambi."
24 * 60.55 + 400 = $1853.20 out of Borrower A's pocket, not including the paydown amount.
Borrower B would spend $1755 over the same period. But, if neither borrower refinanced, wouldn't Borrower B be paying more ultimately than Borrower A? And if Borrower B refinanced, wouldn't the loan origination fees, appraisal fee, documents fee, and points cost more than what Borrower A paid?
What am I missing? Why is a HELOC more frequently offered to home buyers who don't put down 20% nowadays?
Six-eight years ago, some borrowers had private mortgage insurance placed on their mortgages, at a rate varying with the amount mortgaged.
The borrower has the right to request cancellation of PMI when she pays down her mortgage to the point that it equals 80 percent of the original purchase price or appraised value of her home at the time the loan was obtained, whichever is less.
A Home equity line of credit (HELOC) tied to a first mortgage is usually a balloon loan due in 15 years, with a rate higher than the 30-year mortgage.
When I was looking at new purchasers' deeds of trust, it seemed that they all had HELOCs rather than PMI. I'm trying to work out the math. New borrowers go for HELOCs to avoid PMI, but is it a better deal for them?
$200,000 house
$27,000 downpayment
30-year fixed rate: 6%
House Appreciation rate: 3% (yes. historically this is accurate, it's not 23% as a recent homebuyer in San Diego, Phoenix, Las Vegas or Naples-FL might think)
Marginal tax rate bracket: 25%
Borrower A goes for PMI:
$60.55/month added to mortgage
Borrower B goes for HELOC
15-year rate: 6.75% on $13,000
$73.125/month added to mortgage
Twenty-four months of mortgage payments elapse, and Borrower A has prepaid the mortgage, plus has $400 extra to pay an appraiser to say the magic words "Meccaleccahineccahineyho! The house has appreciated enough for you to achieve loan-to-value ratio. Long live Jambi."
24 * 60.55 + 400 = $1853.20 out of Borrower A's pocket, not including the paydown amount.
Borrower B would spend $1755 over the same period. But, if neither borrower refinanced, wouldn't Borrower B be paying more ultimately than Borrower A? And if Borrower B refinanced, wouldn't the loan origination fees, appraisal fee, documents fee, and points cost more than what Borrower A paid?
What am I missing? Why is a HELOC more frequently offered to home buyers who don't put down 20% nowadays?
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