Which Loan is Better?

You have done it! You are ready to close the deal. You scraped together enough money to put a downpayment on your dream home and now you have to discuss mortgage options. Your mortgage company gives you three to pick from. For both options your amount to finance for the home is $200,000. You must pay mortgage insurance (PMI) of $14,400 for the first one, but not the second. You don't have the money available for the mortgage insurance so the mortgage company gives you two options. We will assume that taxes and homeowners insurance are the same for both options below.

Option 1 You can get 8.5% fixed APR for 30 years. In addition, you must pay mortgage insurance. This will add $100 per month to the monthly payment for the first 144 months. This takes the calculated monthly payment and adds the $100 per month to it for PMI. After 12 years, the PMI drops off. (The $100/month is strictly for the mortgage insurance, you do not pay interest on this part. You pay the $100 extra payment, 144 times.)

Option 2 You can avoid the mortgage insurance altogether by doing the following. Take out two mortgages.

Mortgage 1: $180,000 at 8.5% for 30 years.

Mortgage 2: $20,000 at 12% for the first 15 years.