Home Equity Loan to Avoid PMI?

Should he get a home equity loan to cover the 20% down payment so that he doesn’t have to pay PMI (Private Mortgage Insurance)?

QUESTION: A listener asks if he should get a home equity loan to cover the 20% down payment so that he doesn’t have to pay PMI (Private Mortgage Insurance).

ANSWER: Let me first define PMI.  When you take out a conventional - a Fannie Mae loan - you have to put at least 20% down or else they force you to purchase Private Mortgage Insurance, also known as foreclosure insurance.  If you put 20% or more down they will not charge you the PMI, which is $65-$70 each month per $100,000 borrowed. 

In this situation, you’re better off to pay the PMI, but if you can’t make a good down payment, you probably shouldn’t be buying a house right now.

You should not do a home equity loan to cover the down payment because home equity loans have terrible terms: variable rates that vary based on the banks whim, balloon mortgages that come due in 3 or 5 years.  They are just bad loans.  If you take out a fixed-rate, fully-ammotorized second mortgage home equity, the interest is so high that you’ll wish you had just paid the PMI.