In order to buy a home you must have a 20% down payment,
which is difficult for many potential home buyers. Then
they are forced to pay private mortgage insurance, or PMI,
to be able to buy a home. Private mortgage insurance
solves the down payment problem but creates two new
problems. Your monthly payments will be larger and on top
of that it is not tax deductible. Fortunately, there is
more than one way to get your desired home without having
the 20% down payment and avoid PMI at the same time.
A borrower can buy a home with a down payment of 3-5% with
private mortgage insurance. This is also good to give the
lender insurance if the borrower defaults on the loan. PMI
payments can be large amounts so soon the borrower begins
to want to rid himself of those payments. The Homeowners
Protection Act has rules for suspension and cancellation of
PMI when 22% equity is reached in the borrower's home.
Those rules exclude government-insured FHA or VA mortgages
which may be at high risk to default.
Piggyback loans are a way of taking 80% of the sale price
of a home on a loan or a first mortgage and then taking a
second mortgage of 5%, 10%, or 15%. This is a very popular
way of avoiding private mortgage insurance. Second
mortgages have higher rates, but the borrower may end up
saving money because the loan payments are tax deductible
and PMI payments are not. A combination of 80% first
mortgage, 5% second mortgage and 15% down payment is
referred to as 80/5/15. Accordingly, the other two loan
combinations are 80/10/10 and 80/15/5.
With many borrowers going to piggyback loans to avoid PMI,
a solution by the mortgage industry was introduced that it
claimed lowered monthly mortgage payments to the same or
lower level as a piggyback loan. With this option
homebuyers pay a single premium on their insurance and it
is amortized over the term of loan. One of the pitfalls of
this solution is that few lenders offer this option or work
with the PMI structure.
Which loan you choose is entirely dependent on your
individual case. You use all the tools at your disposal to
make an informed decision. Paying the private mortgage
insurance could possibly be a better solution than choosing
to avoid it with a second mortgage. The disadvantage to
loans with no PMI is that they can have higher interest
rates. After making all the necessary calculations, you
should carefully consider your options and try to make the
best choice for yourself.
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Peter Kenny is a writer for The Thrifty Scot, please visit
us at http://www.thriftyscot.co.uk/Loans/ and
http://www.thriftyscot.co.uk/credit-cards/
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