As you have probably noticed, the mortgage market is very different than it was a couple of years ago. You may find that it is much tougher to get a loan, and it is really tougher to find a lower interest loan. PMI, or private mortgage insurance, is also tougher to avoid.

This product is actually insurance that will pay your loan company, and not the borrower, in case the loan goes bad. This reduces the risk to the mortgage company, and they often require the borrower to pay for this extra coverage. It is not intended to help the actual home owner in any way. But the borrower may have an extra few hundred dollars added to their mortgage bill each month.

The most obvious way to avoid paying private mortgage insurance (PMI) is to have that twenty percent down payment. That way you will walk into your home with substantial equity. Your loan company will be satisfied because your loan will not be as risky. If you purchase a $100,000 home, and you put down $20,000, you should not be required to take out this coverage. You already will have some home equity. If things do go south on your loan, a lender is much more likely to be able to recover their share. Most of the time, they like to put the burden of paying for this on you.

But if you do not have the down payment, you still may be able to avoid increased monthly payments, or at least save some money on it. I think this is important to consider, because you could be making a large extra payment that does not help pay off your loan. It really does not give you any value at all besides helping to get you qualified for a loan on a home you want to own.

Lender paid PMI (PPPMI) is one way to reduce the cost. As the name implies, this gets your loan company to assume the premiums for this coverage. In return, they may raise your interest rates a little.

Let us say you have a 30 year fixed loan with a $15k balance and an interest rate of 5 1/2 percent. Your payment for the interest and princicpal would be about $850. In this case, the lender pays the premium in return for a little higher interest rate.

But if you had to pay for PMI, even if your interest was about 5.1%, your payment would be over $100 a month more! This is for the same loan. The only difference is that in one case, you have to pay for the policy. In the other case, the mortgage company will raise your interest rate a little, but pay the PMI.

So you are spending over $100 for this coverage that covers your lender if you default. It seems to me, that if they get the benefits from the coverage, they should pay for it. Even though your interest rate will be slightly higher, your actual payments will be lower.

If you cannot totally avoid it, you might be able to get a better deal if you buy your coverage with a sigle upfront payment. You should get a discount on the price, and you may even be able to roll this into your mortgage. But since you will simply be financing the discounted premium, instead of making premium payments every month, it may work out better for you.

Piggy back loans were the traditional way to avoid private mortgage insurance. An example would be to get one loan to pay 80%, and then get a second loan to cover the other 20% which would have been your down payment. These used to be very popular, but are not as common these days since lenders have made it much harder to qualify without a true down payment.

If you cannot pay a down payment, you really should question if the home purchase is right for you. We have seen a lot of tragedy this past year because people could not afford to keep their homes when they lost jobs or had other financial problems. Beyond the down payment, you will also need money for home insurance, repairs, and upkeep. Sometimes a home purchase makes sense, even if you do not have the money to make a big down payment. It is important to evaluate your own situation before you decide.

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