Q: I’m looking for a condominium and have come to the conclusion that I won’t have 20 percent of the purchase price saved before I buy something. Could you list some of the mortgage options that would allow me to avoid paying private mortgage insurance (PMI)?
A: Most first-time buyers don’t have 20 percent to put down on a home. While PMI exists to help get people over that 20 percent hump, it is expensive and you cannot write off the amount you spend on PMI under current tax law.
Instead, look into a “piggy back” loan, also known as an 80/10/10 (80 percent first mortgage, and then 10 percent second loan, 10 percent down). The 10/10 part can be adjusted to cover whatever cash you already have for a down payment.
For example, if you have 13 percent to put down, then your loan would be an 80/7/13 – 80 percent first loan, 7 percent second loan, 13 percent down.
You’ll close on both the first mortgage and home equity loan at the same time. Typically, the 80 percent loan is fixed, and the home equity portion is adjustable, but it doesn’t always have to be that way. Many lenders offer a variety of flexible options, particularly if your credit is good.
Remember, the interest rate on your second loan will generally be higher than the interest rate of the first loan. But even paying the usual higher rate on a second loan, the amount you pay will generally be less than if you had PMI.
Please take a look on my website for information on “piggy back” mortgages. Then, talk to your local mortgage broker, credit union, bank or mortgage lender about what kind of options they offer.
Until you lay out the details side-by-side, you will have trouble figuring out which loan is right for your personal finance situation.