With the current crisis in the mortgage industry, the likelihood of getting a mortgage with little or no money down is considerably less. Usually coming up with 10% down is sufficient to get a loan. The major drawback of putting down less than 20% is that you almost always have to pay PMI.
The method I used to avoid paying PMI on my first house was something called an 80/10/10 mortgage. The idea is that once you put 10% down on your house, you automatically have 10% equity in your home. That most likely qualifies you for a Home Equity Line of Credit for at least 10% of the value of your home. Taking out that credit effectively allows you to double your downpayment and avoid PMI.
The main advantage of avoiding PMI is that regular mortgage interest payments are tax deductible while PMI is not. Another is that if you payoff your HELOC early, your overall payment will go down without having to refinance.
There can be some disadvantages to this method however. First, some loan companies charge prepayment penalties on HELOCs. Also, if you use up all of your home equity upfront, you can’t rely on it in emergencies. Also, HELOCs almost always have higher interest rates than what your main loan will have.
An alternative to this method would be to use an alternative funding source, other than a HELOC, to kick in the extra 10%. Something with rates comparable to a HELOC, like a P2P loan from Lending Club could work very nicely.
Be sure to look at all of the rates offered to you, the tax advantages of different methods, and the costs associated with a second loan when deciding how to finance your home purchase. The 80/10/10 worked well for me, but it is just one option and you may have better choices for your situation.
If you’re interested in applying for a loan from Lending Club, use my referral link.
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