If you are considering purchasing your home without a down payment, your mortgage lender may require you to purchase Private Mortgage Insurance (PMI). Private Mortgage Insurance protects the mortgage lender from certain losses due to foreclosure. This insurance does nothing to protect the homeowner except add hundreds of dollars to the monthly mortgage payments.
To avoid paying Private Mortgage Insurance, consider an 80/20 mortgage loan. This type of mortgage is usually two separate mortgages: a first mortgage for 80 percent and a second mortgage for the remaining 20 percent. The problem with this type of mortgage is that you will have no equity in your home to act as a cushion. If property values in your area decline you could end up owing more to the lender than your home is worth.
The 20 percent mortgage you receive will most likely be from a different lender than your primary mortgage. This loan will generally come with a higher interest rate than your primary mortgage because there is more risk for the lender. Because you have two separate loans there will two monthly payments you will be required to make; if you fall behind on either payment the lenders could foreclose and take your home. To learn more about your mortgage options, including common mortgage mistakes to avoid, register for our free mortgage guidebook: “Five Things You Need to Know before Refinancing Your Mortgage.”