Actually, there is no limit to the size of a down payment. It can even be 0% with certain kinds of mortgages, but you have to be able to qualify for it. Another tricky part here is the Mortgage Insurance. If your down payment is lower than 20% of the purchase price (or the appraised value, whichever the lowest on the day of purchase) of the property, you will be obliged to pay private mortgage insurance (PMI) premiums until the outstanding balance of your mortgage hits the 80% of the purchase price margin. PMI is usually not cheap, so a lot of people prefer alternatives, such as a conventional second mortgage, a piggyback mortgage (80/20) or LPMI. The size of a second mortgage or a piggyback mortgage is determined by how much cash you are ready to put down, the rest can be borrowed.
If, for example, you are planning to put only 5% of the purchase price down, you can either go for a large 95% first mortgage with PMI, or borrow 80% with a first mortgage without PMI and another 15% with either a conventional second mortgage or a piggyback mortgage. The interest rate on the second mortgage will be higher than that on the first one, but still it will very likely result in lower monthly payments than PMI premiums.
There is also a slight issue of tax deductibility involved. While mortgage interest payments are unquestionably tax deductible, PMI premiums are deductible only for mortgage insurance contracts issued from Jan. 1, 2007, through Dec. 31, 2009.
A borrower has to pay Private Mortgage Insurance (PMI) only if he cannot make a 20% down payment. So, the ways to avoid the insurance are the ways to find enough cash to be able to pay at least 20% of the price of the property in question. Nowadays, the following options are available: a second mortgage; a “piggyback” mortgage; and lender-paid mortgage insurance.
If you already have a mortgage with PMI, you have to bear in mind that you have all the right to have PMI terminated as soon as the outstanding balance hits the 80% of the purchase (or recently appreciated) price of your property. “Recently appreciated” is your opportune key to freedom. If your property has appreciated in value, the absolute amount of 80% of its current price is higher. What’s your advantage? Say, you have a property that was $100.000 worth when you bought it. 80% of this amount is $80.000. This is the magic number that allows you to cancel PMI. You have been paying the mortgage off for some time and your current outstanding balance is $90.000. If your home has appreciated, say, $10.000 through these same years, its current value is $110.000. 80% of this amount is $88.000, which means that with your outstanding balance of $90.000 you are only $2.000 (not $10.000) away from canceling PMI. Neat, isn’t it? Terminating the insurance, however, is not an easy business. Read about the troubles and tribulations involved in my special article. Yet, just one more thing that I want to draw your attention to – the appreciated value of the house has to be documented by an appraiser, accepted by your lender. The procedure is not cheap, so you have to see first if the appraisal will really save you anything in the long run.
Another way to shorten your PMI period is good old extra payments towards the principal. If your mortgage carries no prepayment penalties (any more) each extra penny towards the principal will bring you closer to the 80% margin.
Piggyback mortgages were quite popular before the year of 2007 as a tax deductible alternative for conventional PMI premiums. 2007 broke this subtle balance as Congress made PMI premiums tax deductible, too, but for that one year only. Being limited to certain restrictions and so far unpredictable future, PMI still leaves some room for the piggyback to kick and prove its worth.
First, let me explain how the Piggyback Mortgage option works. If a homebuyer needs to borrow more then 80% of the property’s purchase price, he either goes for one conventional mortgage and pays Private Mortgage Insurance (PMI) premiums, or tries to avoid it by opting for either Lender-Paid Mortgage Insurance (LPMI) or a Piggyback Mortgage, also known as 80/20. Actually, “80/20″ explains a lot by itself: the mortgage is, in fact, a combination of a primary mortgage for 80% of the purchase price and a secondary mortgage for an amount required to fill up after the down payment. The more comprehensive names for this mortgage sometimes are 80/10/10, or 80/15/5, or 80/5/15, indicating the details of the secondary mortgage - 10% borrowed/10% own down payment, 15% borrowed/5% own down payment, 5% borrowed/15% own down payment, respectively. Read the rest of this article »
