Simple ways to help borrowers avoid the pain of PMI.
When borrowers can’t put 20% down, a piggyback loan may be a good solution.
Nobody likes paying for insurance. And that’s especially true for clients who are about to make one of the most significant purchases of their lives. Yet, most borrowers just assume PMI is their only option. The reason? With today’s home prices, many first-time buyers (nearly a third of all buyers) have trouble saving enough money to put 20% down. On average, they financed 93% of their home purchase in 2018.
However, some loan officers and mortgage brokers are advising clients to avoid paying PMI – and for good reason:
- PMI increases monthly expenses.
Rates range from a low of 0.25% to 2% of the loan balance per year, but they generally average between 0.5% to 1%. The larger the loan, the greater the cost.
- They’ll be paying PMI for a decade or more.
Lenders must automatically cancel PMI once equity reaches 22%, but this usually takes about 11 years of regular monthly mortgage payments.
- There are much better uses for the money.
Borrowers can get a better return on investment by making extra payments to build equity, investing in stocks or simply stashing the money in an interest-bearing account.
Borrowers don’t know they have options.
Today’s home buyers do a lot of their own research online, finding houses that they like, and comparing mortgage rates. But most still need—and want—expert guidance about the more complex aspects of the home-buying process. You can gain loyal customers and increase referrals business when you educate borrowers about alternative solutions that help them get the home they want, without the added expense of PMI.
A good solution to a growing problem.
There is an affordable way to reach the 20% down payment hurdle. A “piggyback” loan combines a conventional first mortgage with a home equity line of credit, or HELOC, to eliminate the need for PMI. It’s sometimes called an 80-10-10 loan because 80% of the home price is financed with the first mortgage, a HELOC funds the next 10%, and the borrower’s savings make up the final 10%.
Although borrowers will pay interest on the HELOC, the monthly payment is typically less than the cost of PMI.
Two mortgages may be better than one.
If the idea of carrying two mortgages sounds expensive to your borrowers, simply show them the math. Here’s a quick example of how it works:
90/10 mortgage with PMI
80/10/10 mortgage, no PMI
|10% Down Payment||$50,000||$50,000|
|Primary Mortgage Amount||$450,000||$400,000|
|Primary Mortgage Interest Rate||3.75%||3.75%|
|HELOC Interest Rate||N/A||6.70%|
|Primary Mortgage P&I Payment||$2,084||$1,852|
|HELOC Interest-Only Payment||$0||$279.17|
|Private Mortgage Insurance||$172.50||$0|
|Total Monthly Payments||$2,256.50||$2,131.17|
|80/10/10 Monthly Savings: Using HELOC/No PMI||$125.33|
|80/10/10 Annual Savings: Using HELOC/No PMI||$1,503.96|
Interest-only payments for HELOC for first 10-years
With this strategy, your clients not only enjoy a smaller monthly payment. They can also keep more of their hard-earned cash to use as an emergency fund, or to spend or invest.
Quorum HELOCS offer many advantages for your borrowers — and you.
As leader in residential finance, we offer loans that help you close more deals, and make it easy for your customers to achieve their goals. Your borrowers will also enjoy:
- Up to 95% CLTV
- Loans up to $500K
- 680 FICO score
- Fast approvals
- Minimal paperwork
- Simultaneous closings
We also offer a new Interest-Only RealtyLine Plus HELOC that features a low, 3.95% introductory rate and affordable, interest-only payments during the 10-year draw period.
It’s easy to do business with us.
When you partner with Quorum, you’ll enjoy exceptional service and support. Because we’re committed to getting deals done, our mortgage experts are always available to answer questions and help you get to closing faster. We don’t require a broker agreement or signup fee.
Quorum Federal Credit Union is a leader in innovative mortgage credit solutions. For more than a decade, our alternative lending products have helped our clients the grow their businesses and create win/win situations for borrowers and originators.
Banking That’s Good. For You.™
Quorum Federal Credit Union is a leader in innovative mortgage credit solutions. For more than a decade, our alternative lending products have helped our clients grow their businesses and create win/win situations for borrowers and originators. To learn about how we serve our members visit quorumfcu.org.
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