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.

It is rather risky, I’d say, because it is secured by your home equity. Should you default on your payments, you can lose your home. But the purpose of HELOC is not to deprive you of your property; it is to provide you with some funds when needed. If you make sure that you understand how this mortgage works and do not give in to over-glitter-smiled conditions being pushed on you, you should be OK. Just do not tap into the equity too much.

Other risks to bear in mind, especially if a HEL/HELOC is your second mortgage, are: disqualification from a third loan; serious financial complications if you happen to have to move before the mortgages are paid off.

For more details read Second Mortgage.

And remember - a lot of people use HEL/HELOCs and are happy with the benefits.