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.

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. Even though a second mortgage usually has a higher rate the borrower could save money in the long run due to the fact loan payments are tax deductible unlike PMI payments. 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.

In order to avoid private mortgage insurance, many homeowners are turning to a piggyback loan as a viable option. The insurance is amortized over the term of the loan which simply means a single payment for the homebuyer. The use of PMI has a major drawback with a few lenders unable or unwilling to work or offer this option.

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. When no PMI is taken out for a loan the main disadvantage can be higher interest rates. After making all the necessary calculations, you should carefully consider your options and try to make the best choice for yourself.

Copyright (c) 2008 Peter Kenny