Home buyers may also use second mortgages to eliminate mortgage insurance. For example, consider that you want to buy a house with 5% down payment: you will therefore need financing for the other 95% of the purchase price.
At that level, private mortgage insurance (PMI) is normally required.
If you limit your first mortgage to only 80% of the price, you will avoid paying mortgage insurance. You can then make up the 15% difference with a second mortgage. The two mortgage loans add up to the 95% (80%+15%) financing you need.
Thus, if the purchase price was $100,000, the buyer can obtain a conforming first mortgage of $80,000. Because this is at 80% Loan-to-Value (LTV) ratio, there will be no PMI required. The buyer then obtains an additional second mortgage of $15,000 (15% LTV) for the difference.
For more information, please review the "Mortgage Insurance" article in the "Mortgage Industry" section.
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