When it comes to buying a home, often times people are impatient and do not want to save up any sort of down payment, so they use creative financing to get into a home without making a down payment. This can be done in two different ways, paying a fee for private mortgage insurance, or getting a second mortgage to act as if it were a down payment. Neither of these options financially more desirable than saving up and making a 20% down payment, but one may be much desirable than the other.

The traditional way to avoid paying a down payment is by paying private mortgage insurance. This is insurance that will pay the bank if they have to foreclose on one’s home because of nonpayment. The bank will sell the foreclosed home for what they can, and the private mortgage insurance (PMI) company will write a check to the bank for the difference. You can expect to pay about $50 per month for every $100,000 of home that you have.

In order to get around paying PMI, some creative financiers figured out that they could get into a home without a down payment and avoid PMI. The way they do this is borrow 80% of the money through a traditional fixed mortgage, and then get a second mortgage off the bat for the other 20%. This way they can get into the home without a down payment, and avoid the expensive PMI fees.

It might seem like avoiding paying private mortgage insurance is the way to go by using two mortgages, but in most cases it is a better option just to pay the PMI. The primary reason for this is that the second mortgages that one will get are usually sub-prime loans. They come with higher interest rates and additional fees. When all is said and done, it is cheaper to pay the PMI than to carry the second mortgage through the duration of the loan.

With PMI, you also have the convenience of only writing one check a month, as opposed to two. You also have one loan to deal with instead of two. This way your taxes are simpler, you have less paperwork to deal with, and you need not worry about knowing the terms and conditions of both loans.

Many people used to dislike PMI because it was so difficult to get the PMI cancelled once you get into it. Fortunately federal law changed because of the Homeowner’s Protection Act of 1998, and now your PMI is dropped automatically when the Loan to Value ratio is under 78%.