80/20 Loan Equals Trouble

Don't do the 80/20 mortgage just to avoid PMI (private mortgage insurance).

QUESTION: Listener’s son was approved for an 80/20 mortgage. He wants to take it to avoid paying private mortgage insurance. What does Dave think about 80/20 mortgages?

ANSWER: It’s not a good plan. I hate private mortgage insurance too, but not enough to do this. Private mortgage insurance is foreclosure insurance that you have to buy that protects the bank if you are foreclosed on. If you put 20% down, there is no private mortgage insurance. Second mortgages stink. They usually have higher rates, variable rates and typically have prepayment penalties and balloons on them. Really, really bad plan. After it’s all said and done, you’ll wish you had paid private mortgage insurance. Don’t do it.