Question: Thank you all for your advice. The loan I want to get from the other > bank is a personal loan, not a home loan. I have excellent credit so > hopefully that shouldn’t be a problem. I want to take a personal loan > for the 15% amount at a lower rate and use that to pay off the 2nd > loan, thus lowering my monthly. I want to do the 80/15/5 as opposed to > the 95/5 because not only do I avoid mortgage insurance (which is not > tax-deductible) and pay mostly interest (which is tax-deductible), but > I also gain equity faster since I will be paying principal twice as > fast (the 2nd loan is a 30 year balloon to be paid in 15 years). So, > hopefully, I can secure a personal loan at a lower rate to pay off this > high interest piggyback loan. Am I still missing something? lol
Answer: 1. Getting a personal loan for the 15% will have no tax benefit (won’t be considered mortgage interest). 2. Getting a personal loan may effect your qualification or change your rate. As another poster pointed out, increasing one’s debt effects one’s debt ratio (also known as debt to income or DTI; debt ratios are a percentage of debt compared to your income. If you have a debt ratio of 10, then 10% of your income is expended towards your debt) which could effect both qualification and the original interest rates quoted. 3. Going 95/5. Although you will be required to pay PMI, one needs to weigh this against the benefits a higher loan to value/lower interest rate 1st mortgage. You will pay less mortgage interest during the lifetime of the loan vs. an 80/15/5. As another poster has already indicated, doing the math is the only way to determine what makes sense. 4. Going 80/15/5: Although you avoid paying PMI, your blended rate will always be higher then the 95/5 approach. Whether a combo loan saves you money depends on a number of factors. For example, a combo loan is more advantageous then a single loan with PMI when, 1) The difference in interest rates between both mortgages is smaller, 2) The shorter the term on the second mortgage relative to the term on the first, 3) The higher your income tax bracket.
If you provide the interest rate quoted on your first mortgage, I can assist you in determining the blended rate, breakeven point and whether it is better to get a combo loan or a larger loan with PMI.
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