Avoid PMI on a New Mortgage

If you’re considering a new mortgage, you may not have to pay private mortgage insurance(PMI). Here are some options to consider:

• Put 20% down. If you don’t have 20% to put down, you can avoid PMI by getting a piggyback loan -- a second mortgage that allows you to make the equivalent of a 20 percent down payment by borrowing part of the down payment in the form of a 2nd mortgage. (For example, you might want to put 10 percent down on your new home. To finance the rest, you obtain a first mortgage of 80 percent, and a second mortgage of the remaining 10 percent.) What’s more, a piggyback loan has an income tax advantage: You can deduct the interest from your taxable income, whereas the cost of PMI isn't deductible.
• If you accept a higher interest rate on your mortgage loan, you could avoid PMI. (The rate increases generally range from 1/2 percent to 1 percent, depending on your down payment.) Because non-conforming or sub-prime loans do not conform to standard guidelines, they do not require PMI. And again, the mortgage interest is tax deductible.
• Consider a purchase Home Equity Line Of Credit (HELOC). A HELOC is like a cross between a conventional mortgage and a credit card. With a HELOC, you qualify for a line of credit based on the amount of equity in your home. For purchases, the lender "pretends" that you own already own the house and gives you a line of credit for 100% of its value. You then use the money to actually purchase the property.