The IndyStar.com, in their May 21st 2006 edition of their Your money column, asked several industry experts whether or not “no down payment mortgages” were worth it. The resounding response was …. “it depends.”
Julie Scheers, Bedel Financial Consulting mentions the two types of no down payment mortgages - piggybacks (80-20) and 100% LTV loans (which would require private mortgage insurance). She also smartly mentions that the savings can and be used to pay down the balance or saved in a 401(k). She also smartly warns that if you’re looking at zero-down-payment because you don’t have the discipline to save, you should get your finance sin check first.
Scott K. Ferguson, Halter Ferguson Financial brings up the statistic that 10 years ago, the average down payment was 20% of the selling price. Now, lenders advertise mortgages with 5% to zero down payment. He also brings out actual numbers with respect to how much PMI you’d pay.
The smaller the down payment, the higher the mortgage insurance. A zero-down $100,000 mortgage would have a $1,090 annual PMI premium, amounting to $91 per month more.
Bryan K. Hanner, Hanner Financial Services reminds everyone of the financial pitfalls of a small or zero down payment. A larger percentage of your payments go towards interest and not principal, so you’re not paying off the loan as quickly. He also says that most of the homes he’s seen being promoted as no down payment are in areas where the home is overpriced. Plus, if you’re that strapped for money, you should remember there are maintenance and utility costs associated with owning a home outside of the mortgage payment.
Overall I think this “debate” covers a lot of good ideas and thoughts very lightly and that you should do more research to figure out if the decision is right for you.
Unfortunately they are not. You can’t write off private mortgage insurance payments on your income tax return. It joins the class of payments you’ll make that aren’t tax deductible and they include your homeowner’s insurance payments, homeowner associate dues, any local or county dues, extra payments on the principal, maintenance or repairs. The fact that it’s not tax deductible is one of the reasons why people sometimes consider piggyback mortgages.
Unfortunately, you can’t negotiate your PMI rates but there are other strategies you can employ to avoid PMI altogether (such as obtaining a piggyback mortgage).
The reason you can’t negotiate your PMI premium rates is because the lender that is requiring you to get it isn’t the one setting the rates. They’re getting a quote from one of major private mortgage insurance underwriters and the rates that the PMI underwriters are quoting are based strictly on your credit, down payment amount, and a few other factors. Since the lender doesn’t set the rate, you can’t negotiate with them, and since the PMI underwriters are dealing strictly with numbers, there isn’t any wiggle room their either because you can’t make two underwriters fight for your business.
What you can do, though, is negotiate other aspects of your home purchase such as title research fees, loan origination fees, homeowner’s insurance and the like but private mortgage insurance has little room for adjustment.
I’ve frequently mentioned how I like a piggyback mortgage over PMI because the extra payments (the interest on the second mortgage) but for today I will play devil’s advocate and try to argue the case for PMI and in what situations PMI makes more sense:
Adjustable Rate Second Mortgage
If you are faced with no choice but an adjustable rate second mortgage (as some second mortgages are), you will always want to go the route of private mortgage insurance. The piece of mind you get from knowing your PMI payments will never go up, especially in our rising rate environment, is something that outweighs the fact that it cannot be deducted from your income tax. You may plan to pay off the second mortgage ASAP and thus avoid the hassles of getting PMI cancelled (though that has been made much easier with recent legislation) but if something unforeseen happens - you could be in big trouble if the rate is reevaluated upwards.
One Mortgage, One Payment, One Hassle
Two mortgages means double the payments, double the paperwork, and when it times to do your taxes, double the forms and calculations. If you have everything deducted automatically from your bank, then you don’t have to worry about the double payments but you will have to worry about the rest. PMI isn’t so expensive that it’s worth the time and effort to bother with the additional work.
PMI Cancellation Is Easy Now
It used to be that lenders and the underwriters would make it a pain to get PMI cancelled. Some had rules where you needed to keep PMI on for a minimum of one year, some made you jump through all sorts of hoops, and after you recited the secret code word… they’d cancel your private mortgage insurance payments. Now, with The Homeowner’s Protection Act of 1998 it is automatic when the Loan To Value is under 78% and can be cancelled with a little bit of prompting when it’s under 80%.
So, PMI isn’t that bad. 
So you need to borrow more than 80% of the value of the house and you’re wondering how you apply for private mortgage insurance right? Don’t, the lender will apply on your behalf with one of the major PMI underwriters. You never need to personally apply for private mortgage insurance.
Does this mean that you won’t be able to compare rates? Yes, it means you won’t be able compare rates and pick the best one but they’re all pretty much the same so it won’t make much of a difference. Your time is better spent looking at and negotiating the other aspects of your home purchase such as the title insurance, home inspection, and other contingencies. Also, understanding any favorable tax laws can save you more money than the small percentage points of PMI, at least in the short term. Good luck!