If you have less than a twenty percent down payment on the purchase of your home you may be required to purchase Private Mortgage Insurance (PMI) as a condition of your approval. This insurance will be required until you own twenty percent of the purchase price of your home, as long as you keep your payments current.
You should know that Private Mortgage Insurance does nothing to protect the homeowner. It costs hundreds of dollars every month and does nothing for you but drive up your monthly payment amount. There are programs to help homebuyers without the required down payment purchase homes without private mortgage insurance.
80/20 Mortgage Loans
An 80/20 mortgage is actually two loans and usually has two different lenders. The first mortgage is for 80% of the purchase price and is taken out with your primary mortgage lender. The secondary mortgage is for the remaining 20% that would have been your down payment in the form of a second mortgage. Because there is more risk for this lender the second 20% loan typically comes with a higher interest rate.
There are many advantages to avoiding Private Mortgage Insurance; the main advantage is you won’t have to pay for insurance that does nothing to protect you. This insurance only protects the mortgage lender form certain losses if your home ever goes into foreclosure. PMI is also not a tax deduction where the interest on both loans is tax deductible. You can learn more about your mortgage options by registering for our free mortgage guidebook: “Five Things You Need to Know Before Refinancing Your Mortgage.”
My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
