Dear Dr. Don,
I want to take advantage of the well-priced single-family homes available in today’s market. The homes that I’m looking at have a median price tag of $375,000. I have $60,000 for a down payment and some more for closing costs.

Do I deplete my savings by putting down everything I have and accepting that I will have to take out private mortgage insurance? Or should I consider an 80/10/10 loan so I can avoid PMI and keep some cash at hand? Is there another option?


Jennifer Judgment


Dear Jennifer,
First, paying private mortgage insurance is not the end of the world. It doesn’t last forever, just until your loan balance falls between 78 percent to 80 percent of the home’s value. There are some benefits associated with having just a single 30-year, fixed-rate mortgage.

A piggyback loan does avoid PMI by making the loan-to-value of the first mortgage low enough (80 percent) so the first mortgage lender doesn’t require PMI. The second mortgage takes up the slack. In today’s market, putting 10 percent down and borrowing the remaining 10 percent is going to make financing much easier than if you tried to do an 80/20 piggyback with no money down.

I like the idea that you hold some cash as a reserve and don’t use all your money for a down payment. You need some financial flexibility as well as some new drapes for the new home.

Don’t forget the need to make sure you have affordable loan payments. The smaller the down payment, the larger the monthly payment will be on your new home. Use Bankrate’s ”
How much house can you afford?” and the ”
Mortgage payment calculator” to run your numbers.

The Mortgage Professor, Jack Guttentag, has a ”
Mortgage Piggyback Calculator” that compares the two mortgage options.

A final option is to use lender-paid mortgage insurance, or LPMI. Remember, though, that it’s not really lender-paid — you pay in the form of a higher interest rate on the loan. A
recent Dr. Don column discusses this alternative.

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