Should you pay PMI or get a piggy-back loan?

What do I mean?

Well, suppose you only want to (or have to) put 5% down at closing on your new home purchase.

You have two options.

The first is to take out one loan for the 95% you are borrowing. If you do this, your lender will require you to take out Private Mortgage Insurance (PMI). This protects the lender in case you should default on the loan. It is required on any home purchase where you are putting down less than 80% of the purchase price.

The federal government just changed the law so that PMI payments are tax-deductible (for new loans made in 2007, subject to limitations).

The second is to take out one loan for 80% of the purchase price and a second loan for the other 15% of the purchase price.

If you choose the second option, you'll probably get one low rate for the 80% loan, but have to pay a higher rate on the second loan (due to the increased risk).

You can usually get a fixed-rate or adjustable-rate loan for either or both or all the loans.

So, what you'll want to do is compare the monthly payments for each option.

You may be able to save your self some money, so it makes sense to consider both options.

Complete analysis: When It Makes Sense to Pay PMI for Your Home Loan - By Terri Cullen, The Wall Street Journal