If you buy a house or condo, and don’t have a 20% down payment, your bank will usually require you to buy “PMI” - private mortgage insurance. This is because your bank worries that, if you can’t make your mortgage loan payments, they’ll have to foreclose on your property, and sell it off, out from under you. They figure they’ll be able to get at least 80% of the value, at a fire sale, so that’s why 20% is the magic number.

Basically, PMI is an insurance policy protecting the lender from the risk of you reneging on your loan.

The trouble with PMI is, buyers are basically paying for an insurance policy they may never use. And, PMI is not usually tax deductible, so it’s an added burden to borrowers, with no benefits.

Over the past several years, many banks have offered borrowers a way around PMI. Basically, they offer buyers a second mortgage loan, on top of the first 80% loan. The additional loan can be 5%, 10%, 15%, or even 20% of the purchase price, whatever the buyer needs. The borrower usually pays a higher interest rate on this second loan (it may be structured as a “home equity line of credit”, or HELOC), because there is more risk on the part of the bank.

The good thing about the second loan is, it’s usually tax deductible, just like a regular mortgage loan.

PMI is something to learn more about, if you’re thinking of buying, and don’t have enough for a 20% down payment.

More information: Weighing the Cost of Insurance - By Bob Tedeschi, The New York Times

During the past several years, loan rates have fallen at historic lows, both adjustable rate and fixed rate mortgages.

Over the past year and a half, however, rates have started to climb.

Now, many of those who borrowed are facing the prospect of much higher payments, as their three and five year ARMs begin to reset.

Therefore, many have decided to refinance into fixed rate loans.

Some however, will be better off refinancing into another adjustable rate mortgage, or even sticking with their current loans.

Details: It Seemed Like a Good Bet at the Time … - By Bob Tedeschi, The New York Times

Many people who want to become first-time homebuyers lack the down payment, credit history, or income to make such a purchase a reality.

So, some young people decide to buy a condo or home, with a friend.

This solves the problem of coming up with the money to buy, but it also can create a huge number of problems, for the new co-owners.

The Wall Street Journal Online recently discussed the topic:

Buying a home is risky — in part because it’s a large investment that can take a lot of time and expense to sell. And in an arrangement where two individuals are linked by nothing more than a deed and a mortgage, the risks and complications are heightened.

Say your co-owner gets a job transfer to another state. Do you sell the home? Do you buy your partner out or bring in a new co-owner? And what if you don’t even like a prospective replacement housemate?

If you’re the one who decides to move on, meanwhile, getting your cash out of the deal may be more complicated than if you owned a home on your own and immediately put it up for sale.

How to deal with this? Well, it goes without saying, one word: plan ahead.

Lawyers can protect your interests, as well as those of your friend(s).

Although it may sound cold, “You need an exit strategy,” one attorney warns.

Complete story: Tips for Purchasing a House With a Pal to Save on Rent - By Diana Ransom, The Wall Street Journal Online

Looking to buy a home, but not sure, or unable to come up with the necessary down payment?

A “lease option” may be just the thing for you.

Bob Bruss from Inman News discussed it in a column, recently:

WHAT IS A LEASE-OPTION? A real estate lease of a house, condominium or commercial property, which gives the tenant the option to buy the property, offers both the tenant and landlord many advantages. Much like a new car lease, the renter has the choice of buying the property or not by the end of the lease term.

However, a lease-option is not the same as a lease-purchase. With a lease-purchase, the contract requires the tenant to buy the property, usually within a year or two. But a lease-option doesn’t force the tenant to buy.

Lease-options work especially well when the local market has either an oversupply of house and condo rentals and/or an oversupply of houses and condos listed for sale.

Why? Because you rent the house for a year or two, and, only then, if you like where you are, will you decide to buy (at the pre-determined price). You’ve already put money into the property, so you’ve built equity, while bringing the purchase price lower.

However, if you find that you can get a comparable home to the one you’re in, but for less money, you can just walk away, and buy the other house. (And, don’t forget, renters get a tax deduction on their Massachusetts state income tax return.)

Of course, an attorney should be consulted, in order to make sure your interests are protected.

Here’s an interesting answer to a question that may not be relevant to most of us, but makes you wonder, nonetheless.

Question: DEAR BOB: I plan on paying cash for my next residence. Are there any hidden dangers in paying cash? — Mark

Answer: DEAR MARK: Please don’t do that unless you are (1) very wealthy, (2) will be spending cash you never need to see again and (3) can afford to tie up a large amount of cash in one asset.

A better alternative is to pay a 20 percent or 25 percent cash down payment and obtain a fixed-rate 15- or 30-year mortgage for the balance of the purchase price.

Why?

Well, when you buy, no matter what, you can’t know everything about the home you are buying - most people buy in a new neighborhood, so there might be things about it you find out will affect the ultimate value of your home (like, they’re building a biolab down the street from you), or, you might just not like living there, as much as you thought you would.

If you buy into a condo building, you might find out that all your neighbors are rowdy college-kids, and that, when you try to sell, you have to settle for less than you paid.

Why put all your savings at risk?

In addition, with low interest rates (at 6.5%, mortgage loan rates are still at historically low levels, you can probably find a much better investment for the cash you have sitting in the bank).

Say, stock in a biolab company?

Source: Paying Cash for a Home Carries Risks - By Robert J. Bruss, c/o The Washington Post