Today, Dr. Don discusses how to avoid private mortgage insurance (PMI) and how to pay off a high-interest credit card.

PMI

Dear Dr. Don,
Will a 15 percent down payment on a home be sufficient to avoid PMI or does it have to be 20 percent? My friends tell me to avoid PMI, but other than 20 percent down they don't seem to know how to avoid it. One lender told me I'd need 30 percent down to avoid PMI. Is this common?
Barbara Bungalow

Dear Barbara,
Twenty percent down is the standard hurdle to avoid Private Mortgage Insurance (PMI). If you don't have 20 percent to put down on your home, you can take out a second mortgage at the same time that you take out the first mortgage. These financing plans are named by the percentages attributable to the first mortgage, down payment and second mortgage. In your case you could shop for an 80/15/5 mortgage.

However, there's a trade-off between this approach and one where you take out a first mortgage and pay the PMI premiums. A second mortgage will have a higher interest rate than a first mortgage. The blended rate on the first and second mortgages is likely to be more than the interest rate on an 85 percent loan-to-value first mortgage. You also have to consider closing costs on the second mortgage, and how a second mortgage's shorter repayment terms impact your monthly budget. The interest expense on the second mortgage will generate a tax deduction for most homeowners, but the PMI premiums are not a tax-deductible expense. Work with your lender or mortgage broker to determine which alternative is less expensive on an after-tax basis.

If you aren't able to put 20 percent down, you have to choose between paying PMI until the loan-to-value drops below 78 percent or taking out a second mortgage. For homeowners with mortgages closing after July 29, 1999, lenders are required to cancel your PMI when the loan balance falls below 78 percent of the purchase price. So, if you have 15 percent to put down on a home, you'll have to pay down an additional 7 percent to reach the point where the lender is required to cancel the insurance. At 80 percent loan-to-value you can petition the lender to cancel your PMI policy. See Daniel Ray's article on the Homeowners Protection Act of 1998 for additional information on canceling PMI.

One shortcoming of the act is that it doesn't require lenders to consider your home's appreciation when calculating when PMI must be canceled. Homeowners can use the home's appreciated value to petition the lender to cancel PMI but the lender doesn't have to accept the appraised value as justification to cancel the insurance -- and you have to pay for the appraisal. PMI cancellation provisions are something you should discuss with your lender during the loan application process -- not at closing.

Paying off a credit card

Dear Dr. Don,
I have a credit card debt of about $1,900 at an annual interest rate of 30.75 percent. I'm on a fixed income. How do I pay this debt off?
Craig Credit

Dear Craig,
Ouch! That's the highest interest rate ever reported to me by a reader. Some states have usury laws that wouldn't allow interest rates that high on credit cards. You need to get a lower rate to be able to start paying down the loan balance on your credit card. One way to do this is to work with a credit counselor. Libby Wells' article, Debt reduction: The right call for help can lift your credit card bill blues, will help you understand what a counselor can do for you. The credit counselors can't guarantee that they can get you a lower interest rate, but they will negotiate with your creditors to put together a repayment plan that will get you out from under this debt.

You haven't told me much about your financial picture other than you're in debt over your head and on a fixed income. There may be alternatives to credit counseling that you'd want to consider. The Motley Fool reviews nine different options to repaying debt. One of the other eight alternatives may be more appropriate to your financial situation than debt counseling. Take a look at the list and decide what's best for you.

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-- Posted: Sept. 8, 2000