Using a First and Second Mortgage Loan to Avoid PMI

May 6, 2018
Last updated:
March 2, 2021
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Summary: This article is part of an ongoing series that covers some of the most common mortgage financing strategies used by home buyers. Today, we’ll look at how some borrowers combine a first and second mortgage loan when buying a house in Washington, to avoid paying PMI.

When you take out a mortgage, you may be subject to paying mortgage insurance in addition to interest and other fees associated with your mortgage. But there are ways to avoid paying it.

The First and Second Mortgage Strategy

What does it mean to use a first and second mortgage loan? What are the advantages? And how does it all work?

Let’s start by covering some of the terminology being used here:

  • First and second: Some home buyers in Washington State use both a first and second mortgage loan when buying a house. Together, the two loans add up to the amount that is needed to finance the purchase (minus the down payment). There are some advantages to using this strategy, as explained below.
  • PMI: Private mortgage insurance is a special type of insurance policy that covers lenders from losses related to borrower default. Some borrowers, particularly those who make smaller down payments, are required to have PMI while others are not. Generally speaking, if the loan accounts for more than 80% of the home’s value, private mortgage insurance is required.

There is a direct relationship between the first and second mortgage strategy, and PMI. Here’s the short version: By combining two home loans, borrowers can finance a larger purchase without having a loan-to-value (LTV) ratio that exceeds 80%, thus avoiding the “trigger” that requires private mortgage insurance.

The cost of PMI varies. Policy premiums typically range from 0.3% to about 1.5% of the original loan amount, paid annually.

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A Way to Avoid PMI in Washington

PMI is a standard mortgage-industry requirement. It is usually required when borrowers take out a conventional home loan to buy a house, with a down payment of less than 20% of the home’s purchase price. (Because a down payment below 20% results in a loan-to-value ratio above 80%, which is the threshold for PMI coverage.)

But that’s when a single mortgage loan is being used. By combining two loans, home buyers in Washington State can purchase a house with a down payment below 20% — while also avoiding PMI.

Here’s a hypothetical but realistic financing scenario to illustrate this concept:

A home buyer in Seattle, Washington wants to buy a house valued at $900,000. This borrower uses a first mortgage in the amount of $700,000 (which is lower than the conforming loan limit for King County). The borrower also takes out a second mortgage loan for the amount of $110,000. That adds up to about 90% of the purchase price. The borrower then makes a down payment of 10%, in order to reach the full 100% of the price.

In this scenario, the first (and larger) home loan accounts for roughly 77% of the purchase price. This means that the LTV ratio is below the 80% threshold that typically requires private mortgage insurance. This is an example of combining a first and second loan in order to avoid PMI.

This strategy might not work for all home-buying scenarios. But in some cases, it might be the best option for Washington home buyers who (A) want to purchase a relatively high-priced home, and (B) want to avoid paying PMI.

Bottom line: Today’s mortgage industry is more flexible and diverse than many people realize. There are a wide variety of products available today. That’s why it’s so important to speak to a knowledgeable loan officer who understands all of the different financing options.

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Need a Home Loans in Washington?

Will you need mortgage financing to buy a home? At Sammamish Mortgage, we offer a wide variety of mortgage programs and tools with flexible qualification criteria. We serve the entire state, as well as the broader Pacific Northwest region that includes Oregon, Colorado, and Idaho. Please contact us today with any financing-related questions you have.

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