If you're in the market to buy your first home with less than 20% down you will be told you must pay for Private Mortgage Insurance or PMI. You realize that this will increase your monthly investment considerably and are wondering if there are any alternatives. Read on.

Thanks to fierce competition in the mortgage industry, there are ways to avoid PMI even with only five percent down. First, let me explain what PMI is. Lenders get nervous when a loan exceeds 80% of the purchase price so they charge PMI. PMI is a monthly premium that is attached to the monthly payment. An outside insurance company actually insures a percentage of equity in the home for the lender or bank. This reduces the lender's exposure to the same level as if the borrower put down 20-25 percent. The problem is that the borrower pays for it every month and it's the lender that benefits. It does nothing for the homeowner. You can't even take a tax deductible for PMI!

The best way to avoid PMI is to break up your loan into two seperate loans. For example; you have 10% to put down and need to mortgage 90%. Well, this means that you would obtain a 80% first mortgage and a 10% second mortgage and you would bring the other 10% as your down payment and this will add up to the 100% of the purchase price of the property.

It's important to know a couple of things: First, the interest rate on the 2nd mortgage is usually higher than the 1st mortgage. Expect to pay 7.5 or 8%. Second, some 2nd mortgages have a "balloon" feature. This means the balance on the 2nd mortgage must be paid off at a given time - usually 15 years. Now, remember that even though the interest rate is higher on the 2nd mortgage at least you can write off the interest at tax time!! You cannot write off PMI!! So, sit down with your realtor or mortgage person and run the numbers to be sure you get a clear understanding of the benefits you are looking for.

So, there you have it. Get PMI out of your mind and sit down with a good loan officer and ask about these programs to take away the PMI cost. Good luck!