Mortgage Help   Mortgage Rates Real Estate Credit Foreclosure Tax Mortgage Rates Mortgage Basics Chapter 1: How much house can you afford? Homeownership Should You Buy or Rent Summary   Chapter 2: Adjustable-rate mortgages ARM and a fixed-rate mortgage Fixed-rate mortgages Understanding the key elements Which type of lender is right for you? Other types of mortgages Subprime Summary   Chapter 3: Your credit score Down Payment How lenders set rates Low down payments Mortgage insurance Your mortgage payment Mortgage Points Summary   Chapter 4: The good faith estimate Inspection and Insurance Necessary paperwork for a buyer Other lender paperwork Paperwork and fees Prequalification and preapproval Special circumstances Summary   Chapter 5: Ten questions to ask Turned down for a mortgage Underwriting What lenders ask Summary   Chapter 6:  Understanding the closing process Escrow Summary   Chapter 7: When your mortgage is sold Avoiding foreclosure Paying ahead Payment changes Refinancing Removing mortgage insurance Summary Mortgage insurance If your down payment on a home is less than 20% of the appraised value or purchase price, you will be required to pay private mortgage insurance, or PMI, each month. PMI usually amounts to about 1% of the loan amount. You will pay the premiums each month, but you aren't the beneficiary - the lender is. PMI protects the lender in the event you default on the mortgage. If you stop paying, the insurance company will pay the lender in full. While PMI premiums are usually added onto your monthly payment, there are some lenders that allow you to pay for it in a lump sum at closing. This helps keep your monthly payment amount down. If you put 10% down on a $150,000, you would be required to purchase PMI. The lender would multiply the principal loan amount, or $135,000, by .005%. The resulting amount, $675, is your annual PMI premium. This is then divided into twelve monthly payments of $56.25. Most home buyers are not able to save 20% for the down payment on a home. On a $150,000 home, 20% would be $30,000. But once the principal balance has been paid down below the 80% mark, the borrower can cancel the PMI. Until you reach the 80% mark, you will have to keep paying the PMI. But there are a few ways to avoid paying PMI. Pay a higher interest rate Some lenders will waive the PMI requirement if you are willing to pay a higher interest rate on the mortgage. The rate increase can be anywhere between 0.75% and 1.00%, depending on the down payment. The benefit is that you can deduct your mortgage interest paid, but not your mortgage insurance premiums. But you will pay more interest over the life of the loan because of the higher rate. It will probably cost you more in the long run. Use a piggy-back loan A piggy-back loan is taking out two loans to purchase one house. The borrower is approved for a mortgage of 80% of the sale price. He can pay 10%, leaving a 10% still to be found. A second mortgage may be allowable that would pay the remaining 10% of the down payment. The second mortgage will have a higher interest rate, but will still be lower than the monthly PMI payment. Plus, the mortgage interest paid is tax deductible in most situations. This is also called an 80-10-10 mortgage, even though there are other varieties, such as 80-15-5. Let's look at the numbers in a piggy-back loan. Under the 80-10-10, the 10% down payment is $15,000 on a $150,000 home. The first mortgage would be for $120,000 at a 7% interest rate. The monthly total for the first mortgage is $798.36. The second mortgage would be for the remaining 10%, or $15,000. It would come at a 9% interest rate and a monthly payment of $120.69. The total monthly payment between the two mortgages is $919.05. A mortgage of $135,000 with only a $15,000, or 10%, down payment has an interest rate of 7% and a monthly payment of $898.16. You will be required to pay PMI in the amount of $56.25 each month. The total payment would be $954.41.