Private Mortgage Insurance or HELOC?

[PauletteGoddard]

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?

[creditcardfree]

Taking out a home equity loan also allows you to deduct the interest on your taxes. One cannot deduct PMI.

I honestly think that there is just a general aversion to PMI and that banks probably do make more money on home equity loans. Just my opinion.

[LuxLiving]

Boy I sure don't know the answer - can you contact a local realtor perhaps the one you used to purchase your house and ask them the question?

[Hot dog]

That is interesting Never thought of that I am a borrower B I did it because I thought I might be coming into some money to cover the costs of the second loan and if I put it all together it would have made my 30 year mortgage that much more for 30 years and unless you refinance no matter how much extra you pay on your mortgage it won't go down this way when I pay the other off it will go down that much but if I don't pay extra on 25,000 in 15 years it will only go down like 3,000 then you have to pay it off or refinance

[PauletteGoddard]

can you contact a local realtor perhaps the one you used to purchase your house and ask them the question?

I asked my happy lender (cue accordions and tuba). Given the above information, the PMI seemed to be the least costly, overall, to new homebuyers.

I neglected to mention that 25% LTV would be required for FNMA mortgages to qualify for PMI removal. Apparently HELOCs since 2001-2002, when the prime rate was lo-o-o-o-ow, have been an easy sell, but prospective homeowners might not be asking the right questions.

**the below is a fantasy conversation if homebuyers asked about the difference between HELOC and PMI. This never happened when I spoke to my lender about this hypothetical situation**

Lender: "so that's a standard fixed mtg at 6.5% for 30 years for 85% of the house, and a 7.8% HELOC for 5% of the house selling price."

Homebuyer: "Why not Private Mortgage Insurance?"

Lender: "Because it sucks. You can't deduct the interest on your taxes."

Homebuyer: "Yeah but for how long is the suckitude? Is the HELOC less sucky for longer? Do we want to go for the $60/month for 24 months short-term suck plus the $400 appraisal suck, or $73.55/180-month long-term kinda-suck? What does it take to get out of PMI? What does it take to get out of the HELOC second mortgage?"