Lenders require Private Mortgage Insurance on most conventional mortgages because experience reveals a strong correlation between borrower equity and default. The less money a borrower has invested in a home, the greater the probability of default. Thus, PMI is a financial guaranty that protects lenders against loss in the event that a borrower defaults. Without that financial guaranty, lenders will typically require a down payment of at least 20 percent.

 In order to eliminate the need to purchase PMI, it is now very common for borrowers to get a 1st and 2nd loan on a property.

Here's how it works

You have 5% to put down. You create a 15% 2nd mortgage, giving you a total of 20% to put down on an 80% mortgage. Typically the 2nd mortgage is at a higher interest rate than the first. Given this, the purchaser is more likely to pay the second off quicker in the meantime increasing equity in the home. The benefit of creating this type of loan is that the interest is tax deductible. PMI is not tax deductible. The end result gives the purchaser more buying power than using PMI.

The only negative to this strategy is sometimes the lender ends up charging expenses on both loans, so you pay double closing fees. Once again, a good lender will know how to originate two loans simultaneously without charging a small fortune!