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.

To ask a question of Dr. Don, go to the ” Ask the Experts” page, and select one of these topics: “financing a home,” “saving & investing” or “money.”