Q. My wife and I are first time homebuyers. I have talked with several mortgage companies about what we qualify for, etc. Several of the companies are pressuring us to take a 5/15/80 mortgage as opposed to the standard PMI 5/95 mortgage. I understand the split mortgage gets you more ownership faster, but is it prudent in the long run? The house we're buying is in an area that appreciates at a steady rate, so I think I'd be better off doing a PMI loan and paying down the principal earlier. I figure I can get to 10 percent through payments and 10 percent appreciation in a couple of years so that I could eliminate PMI in a few years. What is your advice on this?

---C.S., by e-mail from Dallas


A. Lets start with some basics. If you have a 20 percent down payment, you can finance a house without any Primary Mortgage Insurance. You may also be able to avoid monthly contributions to an escrow account for real estate tax and insurance payments, which you will be thankful for each time your mortgage is sold.

If you don't have 20 percent to put down, you have a choice. You can borrow 95 percent of the purchase price and pay for Primary Mortgage Insurance. Alternatively, you can take out a conventional 80 percent mortgage with no PMI and borrow an additional 15 percent of the purchase price as a second mortgage. The interest rate on the second mortgage will be higher than the rate on the first mortgage and the monthly payment will probably be based on a 10 to 15 year repayment.

Using a second mortgage for 15 percent of the sale price of the house has become a very popular way for homebuyers to avoid the expense of Primary Mortgage Insurance. Here's why. If you add your PMI premiums to the interest cost for the additional money you are borrowing--- the increase from an 80 percent to 95 percent mortgage--- the effective 'interest rate' on the additional borrowing is often higher than the interest rate on second mortgage money. In addition, the interest on the second mortgage is tax deductible. PMI premiums are not tax deductible. As a result, the after-tax cost of the second mortgage route can be lower than using PMI. Your equity build-up will be somewhat faster.

In the end, this is a detailed pencil and paper exercise where you make a careful comparison of the offers


Q.   How can the stock market be expected to rise at a 10 percent rate, long term, when the economy only grows at 3 percent? If it can't, then doesn't the current valuation of 25 or higher times actual earnings practically guarantee a long period of poor performance such as from 1965 to 1982?

If so, why isn't it much wiser to invest in AAA bonds or in Ginnie Maes, currently yielding nearly 7 percent? Finally, why not buy the bonds or Ginnie Maes directly, rather than in a fund, where the managers seem to take out about 20 percent of the earnings to run the fund?

---L.J., by e-mail, Granbury, TX


A. Lots of people are asking your first question, including some high-powered researchers. I've mentioned three of them in recent columns. I suspect that the current market malaise can be traced directly to such issues.

Many people forget that nearly half of the 10 percent long-term return figure for common stocks comes from the reinvestment of dividends. In addition, dividend yields were much higher. Some argue that dividends are smaller today because companies pay out less in dividends. Instead, companies prefer to let investors take their returns in low taxed capital gains.

Unfortunately, that idea only works if companies put the retained earnings to good use. Today there is evidence that it wasn't put to good use.

So shifting to bonds may be a good idea. I don't, however, agree with you about buying individual securities. It is really easy to get skinned in the purchase of corporate bonds. It is still easier to get mauled buying a GNMA. The best path, other than individual Treasury securities, is to buy a low cost fund.