| In an earlier article, we presented various options | | | | to have good credit scores to qualify, but if you |
| for ensuring that you have positive cash flow | | | | do, they are very attractive. The problem with a |
| when holding rental houses, by minimizing loan | | | | HELOC based on the prime rate is that it |
| payments. One problem which we now can | | | | assumes the prime rate does not get too high |
| address is to how to eliminate the need for | | | | before you pay it off. As you may recall from |
| paying mortgage insurance. | | | | the early 1980s, the prime occasionally does go |
| Any loan with less than 20% down payment will | | | | sky high and it could happen again. |
| include or require mortgage insurance. It may be | | | | There is a particularly wide variation in the interest |
| included in the rate (which is called "Lender Paid | | | | rates for second mortgages from various lenders. |
| Mortgage Insurance" or LPMI) or more commonly | | | | Moreover, if your credit, income, and assets are |
| it is a separate itemized item, but in either case | | | | not ideal, you may not be qualified for certain |
| you must pay it. | | | | second mortgage programs, so it may be more |
| If you want to pay less than 20% down, the | | | | difficult to find a second mortgage at a good rate |
| best way to get around mortgage insurance is to | | | | that you do qualify for. It is very important |
| finance your purchases with two loans, a first and | | | | therefore to ask your independent loan broker to |
| a second mortgage. For example, the first | | | | check out various options and to shop the rates. |
| mortgage is commonly 70%, 75% or 80% of the | | | | He/she should be comparing at least half a dozen |
| purchase price and the second mortgage makes | | | | different second mortgage programs. |
| up the difference to 90% or 95% of the | | | | When you use two loans as described above, it is |
| purchase price. You can get both mortgages from | | | | usually advisable to have an interest-only or |
| the same lender, but usually you can find better | | | | minimum payment loan for the first mortgage. |
| rates on the second mortgage from a lender that | | | | This allows you to focus on paying down the |
| specializes in second mortgages. An independent | | | | principle on second mortgage over a period of |
| loan broker can put this together for you nicely. | | | | say 5 years, if you can afford it. If you cannot do |
| Both mortgages typically close escrow at the | | | | that, than obtain a second mortgage that also has |
| same time and both lenders are fully aware of | | | | a 5-year fixed period and an interest only option. |
| each other. For simplicity, put both loans in the | | | | You are then covered with predictable and low |
| same escrow and sign them both at the same | | | | payments for at least 5 years. |
| time. If you want to be tricky and try to use two | | | | This article has reviewed a strategy for improving |
| mortgages to get to 100% financing (i.e. no down | | | | your cash flow when purchasing investment rental |
| payment), there are ways to do this, but we do | | | | homes -- namely, using two loans to eliminate |
| not recommend it and it is not within the scope | | | | mortgage insurance. There is much more to say |
| of this article. | | | | on this topic. So keep an eye out for additional |
| The second mortgage is typically at a higher | | | | articles by the same authors on this and related |
| interest rate than the first, but not always. For | | | | topics. |
| example, there are some very competitive home | | | | (c) Copyright 2004, Jeanette J. Fisher and Robert |
| equity lines of credit (HELOCs) with rates only a | | | | S. Kramarz. All rights reserved. |
| fraction above the prime interest rate. You have | | | | |