Since conventional loans were not included in these programs, the creation of a similar type of program that would lower the risk of high L-T-V loans evolved through the implementation of private mortgage insurance. 

Private mortgage insurance or "PMI" was modeled after these earlier government insured programs with the creation of the Mortgage Guaranty Insurance Corporation (MGIC or "Maggie Mae).  

PMI companies simply provide insurance against borrower default on conventional loans having a loan-to-value ratio of more than 80%.

This concept is similar to coinsurance whereby the lender or any secondary market investor who later acquires the loan, is protected against borrower default for a portion of the loan amount, usually the top 20 percent.  

The Positive  

• Buyer makes a smaller down payment; lender increases loan production.  
• Attracts more investors to real estate financing markets, lowers risk, stimulates activity in the secondary mortgage market, and creates lender liquidity.
• Is a credit guarantee for lender.   

The Negative

• Borrower pays a fee for this insurance coverage even though it is the lender being protected
• Required when loan-to-value is greater than 80%  
• Payment is generally not tax deductible

Alternatives to PMI

• Lender may waive PMI in exchange for a higher interest rate on the loan.  Effect: May equate to a few dollars less per month in the monthly payments.  Also, the additional interest is usually tax deductible while the PMI insurance is not. 

• Some lenders offer a "split" first mortgage (for up to 90% of the value of the home) into two loans referred to as a "80-10-10" loan.  Effect: May provide a greater savings over the loan term instead of increasing the rate.

Example Of How A 80-10-10 Loan Works
 

Conventional 90% Loan With PMI

Purchase price

80-10-10 Loan

PMI Insurance

 0

Loan-To-Value

The catch......usually second mortgages carry a higher interest rate than first mortgages however, the higher rate only applies to the 10%. Also, this requires that the second mortgage portion of the loan must be at least 10% of the total value of the property. The total of both payments is still less in some cases.  Further, there may be additional tax savings.  

The 80-10-10 can also be used to refinance and completely eliminate mortgage insurance possibly adding up to savings for home borrowers. Your lender should be contacted to discuss this concept.  Some buyers or properties may require special qualification to receive the 10% second mortgage.