 Dear
Dr. Don,
I took out a second mortgage to avoid private mortgage insurace (PMI). Can I refinance and combine my first and second and still avoid PMI with less than 20 percent equity in the house?
-- Justin Time
 Dear
Justin,
Homeowners hate paying private mortgage insurance. The idea of paying an insurance
premium to protect the lender just doesn't sit
right with them. You used a piggyback loan
structure to avoid paying PMI on your first mortgage. The downside to that is the interest rate on the
second mortgage is often at an above-market rate,
especially if you didn't have much, if any, equity
in the property when you bought it.
If you don't have 20 percent equity
based on the newly appraised value of your home,
then a conventional first mortgage is still going
to require PMI. That may be OK if you have
enough equity in the home to get a good rate on
the new first mortgage. PMI isn't forever.
The Bankrate feature, "Removing
private mortgage insurance," explains
how you can get out from under PMI at a later
date.
The Mortgage Professor's Debt
consolidation calculator can help you decide
if refinancing makes sense and estimates the PMI
payment on a new first mortgage.
There are some other options as
well. You can shop for a first mortgage
that doesn't require PMI. It's called a
self-insured mortgage when the lender prices the
default risk into the loan. You'll pay a
higher interest rate than with a conventional
mortgage, but may recoup a portion of that if
you can use the mortgage interest deduction on
your tax return.
With a tax law change in 2006, PMI payments made
in 2007 may be tax deductible. The Bankrate feature,
"New
tax deduction created for mortgage insurance,"
explains the change. No word yet on whether
the deductibility extends into 2008.
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