Free Advice from NAFPA August 17 and August 30

You might want to know about Kiplinger's Jump-Start Your Retirement Plan Days, two days of free financial advice by phone or e-mail on Friday, August 17, and Thursday, August 30 (9 a.m. to 6 p.m. eastern time on both days) from planners who are members of the National Association of Personal Financial Advisors (NAPFA).

Normally, these fee-only planners, who are well versed in investments, taxes, insurance, estate planning and saving for college and retirement, charge clients $100 to $250 an hour. But on Jump-Start Days, you don't pay a cent -- not even for the phone call. Just dial 888-919-2345 and a NAPFA adviser will respond to your question. Or, if you prefer, you can e-mail your question in advance starting August 1 to jumpstart@kiplinger.com and a NAPFA adviser will reply on one of the Jump-Start dates.

Why PMI?

Private Mortgage Insurance aka PMI is extra insurance that lenders require from most home buyers who obtain loans that are more than 80 percent of their new home's value. PMI enables borrowers with less cash to have greater access to home ownership. PMI can add a significant amount of money to your mortgage payment every month. Is it really worth it? There is a better way!

Enter 80/15/5 financing. Or, if you prefer, 80/10/10 financing. Avoid PMI with as little as 5% down. How? By financing your 15% down payment with a piggyback home equity loan.

This is how it works. You receive a first lien loan from the primary lender for 80% of the purchase price. This loan is a secondary market or conventional loan, basically meaning that it's salable on the open market. Then, you receive a second mortgage, probably from the same lender for 15% of the purchase price. The difference here is that this second loan is normally held by the lender in their portfolio. The terms might be different than those of the first loan, but you'll only have to pony up 5% down payment plus closing cost.

By financing only 80% on the first mortgage, you avoid the PMI. Each payment that you make on the first and second mortgage is reducing the amount that you owe thereby building equity in your home. With PMI, you'd be paying a monthly insurance premium instead of building equity. Moreover, PMI is not tax deductible whereas the interest that you pay on the second mortgage in most cases IS tax deductible.

What if I have PMI now? Can I get rid of it?

The answer is "maybe". By law, a lender has to drop PMI once the loan to value reaches 78%. This calculation is based upon the current loan balance divided by the original value of the home.
But what if the balance hasn't dropped below 78%, but your property value has increased due to rising market values? If you can prove this to the lender, then they may drop the PMI. How do you prove it? You should first contact the lender or whoever is servicing your mortgage. Tell them that you believe the loan to value is below 80% and that you'd like to have them drop the PMI from the loan. Ask them what they will require of you. In most cases, you'll need to provide a property appraisal report at your expense. In our market, this would cost somewhere in the neighborhood of $375.00. In most cases, the lender will order the appraisal for you from a list of their independent appraisers.

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