You would like to own your own home, but the standard 20 percent down payment just isn't happening. You've heard about private mortgage insurance, but that option doesn't appeal. You've also heard of something called a piggyback loan, and you wonder if that might be an alternative to PMI. Actually, piggyback loans are an option for many home buyers, but there are also potential pitfalls. Consult with a financial professional to make the best choice for your personal circumstances.
If you can't come up with 20 percent down payment for a conventional mortgage, you'll have to purchase PMI to provide your lender with a hedge against the possibility that you'll bail on the mortgage. The actual amount of PMI you will have to purchase varies with how much of a down payment you post and the size of your mortgage. Federal Housing Administration mortgages don't have PMI; instead, FHA borrowers must pay a mortgage insurance premium for a guarantee on the loan provided by the government.
Piggyback Loan Definition
One way to avoid PMI is to take a second mortgage to cover a portion of the down payment, along with the regular mortgage, while you pony up the rest. The piggyback loan is also known as an 80-10-10 loan because borrowers often borrow 10 percent of the home price for the piggyback loan and make a 10 percent down payment, although some lenders will allow borrowers to take a 15 percent piggyback loan, and a few may even allow lenders to borrow 20 percent. Piggyback loans run simultaneously with the regular mortgage, which means you have to make payments on both loans each month.
Piggyback Advantages and Disadvantages
Taking a piggyback loan can result in lower monthly payments than a mortgage with PMI. In addition, you can deduct the interest on a piggyback loan on your federal income tax return. PMI is not tax deductible; a temporary tax deduction for PMI and government-issued mortgage insurance expired in May 2012. If you're buying a more expensive house, a piggyback loan can keep your primary mortgage under the limit set by Freddie Mac and Fannie Mae for "jumbo" mortgages that carry higher interest rates. However, piggyback loans typically carry higher interest rates than primary mortgages. You also need a higher FICO score to qualify for a piggyback loan than for a primary mortgage.
Getting Rid of PMI
Even if you can't get out of purchasing PMI initially, you're probably not stuck with paying it forever. The Homeowners Protection Act of 1999 states that your lender must let you know how long it will take for you to reach the level where you owe 80 percent on your mortgage. Once your balance hits 78 percent, your lender must cancel PMI. You can make this happen more quickly by making larger monthly payments, or by making improvements to increase the value of your home, which also increases your equity.
- Bankrate.com: Should You Jump on a Piggyback Mortgage?
- Bankrate.com: The Basics of Private Mortgage Insurance
- Lending Tree: Which Is Better? PMI or Piggyback Loan?
- LowerMyBills.com: What Is PMI?
- GoBankingRates.com: PMI or Piggyback Loan?
- Bankrate.com: No PMI With FHA Mortgages
- Los Angeles Times: Federal Tax Deduction for Mortgage Insurance Premiums Expires
Chris Blank is an independent writer and research consultant with more than 20 years' experience. Blank specializes in social policy analysis, current events, popular culture and travel. His work has appeared both online and in print publications. He holds a Master of Arts in sociology and a Juris Doctor.