Home Equity Loan Refinance

Converting 80-20 Home Loans

Private mortgage insurance (PMI) protects the lender from the costs of foreclosing on a house when the borrower falls too far behind on the loan payments. The lender benefits, but the borrower pays. Generally, PMI is required when the loan amount is for more than 80 percent of the home's price. Many buyers with insufficient funds for a 20% down payment avoid PMI by getting an 80-20 loan--a main mortgage for 80 percent of the home's price and a "piggyback" second mortgage for other 20 percent. There's no PMI, so borrowers save about $100 each month. However, lenders charge higher interest rates for no-down-payment loans to compensate for the risk of a property with no equity. And, with 80-20 loans, the 2nd is typically an adjustable rate loan.

With interest rates rising, converting 80-20 home loans to single fixed-rate mortgages is an excellent way to refinance debts to 100% and lock in on fixed rates before the next rate hike. Even though you'll pay a higher interest rate because the CLTV (combined loan to value) exceeds 80%, it will probably work out to less than the rate of your 1st plus the adjusted 2nd. You'll only be making one mortgage payment, and you won't have to worry about rate hikes any more. As the housing market cools, interest rates will continue to rise, so it's best to lock in on a fixed rate now by converting your 80-20 loan to a single fixed-rate mortgage or at least refinancing your variable rate 2nd mortgage.