As home prices continue to climb, borrowers increasingly
turn to 100-percent financing, and especially home loans that sidestep the need
mortgage insurance. Here is how to avoid paying PMI.
One such loan is known as the 80-20
mortgage. The home
buyer takes out two loans -- the first for 80 percent of the purchase price, and
the second for 20 percent of the home's price. The borrower is expected to come
up with the closing costs.
"It allows people to buy without a down payment, or for
those people who would prefer not to touch their savings to get into a house,"
"What we're seeing is a lot of young professionals," he
adds. "People who have gotten out of college and have good jobs. They have good
credit, but they haven't had the opportunity to accumulate a lot of savings."
are targeted at people who feel stuck on the rent treadmill.
They can afford monthly rent that costs roughly the same as a house payment, but
after they pay their monthly bills, they can't save much money toward that down
payment. Many of these people watch home prices rising faster than their incomes
and feel that they're falling further behind with each month that they rent.
mortgage programs allow borrowers to buy
houses with little or no money down, but they usually require private mortgage
insurance, or PMI. Mortgage insurance protects the lender from the costs of
foreclosing on a house when the borrower falls too far behind on the loan
payments. The lender benefits, but the borrower pays. Generally,
insurance is required when the loan amount is for more than 80 percent of the
The way to avoid paying mortgage insurance is by getting
a "piggyback loan" -- a second mortgage to back up the first mortgage. The first
and main mortgage is for 80 percent of the home's price. The piggyback loan is
for 20 percent of the home's price, minus the down payment, if any. If you see
mention of an 80-15-5 loan, it means that the borrower got a main mortgage of 80
percent of a home's purchase price, a piggyback loan for 15 percent, and made a
5-percent down payment. Many other combinations, such as 80-10-10, are possible.
The 80-20 uses a piggyback loan without a down payment.
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