NEW YORK – Buying a house by making a down payment of less than 20% can add an extra $10 to $200 to the monthly bill if you have to obtain private mortgage insurance. PMI, which compensates the lender if the homeowner defaults on the mortgage, varies according to the size of the loan.
There are strategies, however, to avoid PMI.
If you can come up with a 10% down payment, the other 10% can be supplied through a private loan -- giving you the 20% down payment. The second, "piggyback" loan often comes with a higher interest rate, but it can be a better deal after tax considerations than paying the PMI. This option, however, should be weighed carefully.
These lenders, rather than charge PMI, bump up the interest rate a quarter point or so to compensate themselves for the greater risk of default on low-down loans. The advantage of paying the higher rate is that the interest charges are deductible on federal income taxes; PMI payments are not.
Home values in many parts of the country have increased steadily over the past few years. The amount you owe for your mortgage may have dropped to less than 80% of the home value, simply because the equity has risen so dramatically. (Note: no matter how much your home has appreciated, you still must pay the first two years of the PMI.) Lender policies vary on PMI cancellation, so you'll need to check the rules of your institution. And you'll need an appraisal.