Piggyback Mortgages: Avoiding PMI

For many mortgage borrowers, private mortgage insurance (PMI) is not a welcome expense. It usually is necessary for individuals to pay for PMI on a loan when the amount of the loan is over 80% of the cost of the home. However, there are ways to get around having to pay this cost if your situation normally would require it, and obtaining a piggyback mortgage is the most popular.

The Purpose of PMI

The “ideal” down payment to make on a home, in most cases, is 20% of the home’s value. Years ago, if you did not have this money to put down then you could not get a home. The idea of private mortgage insurance was developed to give borrowers the opportunity to purchase a home while making a smaller down payment. PMI is supposed to protect mortgage lenders against default when a borrower has put a small (or no) down payment on a home.

The cost of private mortgage insurance generally is about .5 to 1% of the home’s value, usually divided into monthly payments. The specific cost depends on your unique circumstances, including the amount of your down payment, the cost of your home, and the other terms and conditions of your mortgage agreement.


The Piggyback

If you are set against paying for PMI, then a piggyback loan is just what you need. In actuality a piggyback is two separate mortgage loans from two separate lenders, and also might be referred to as an 80/15/5 loan, an 80/10/10 loan, or an 80/20 loan depending on the circumstances.

When you take out a piggyback you take out two separate loans, both of which do not exceed 80% of the home’s value. Thus, each loan is lower than the loan that requires one to incur the costs of private mortgage insurance. The loans with specific numbers attached break down to the following:

80/15/5 -- You make a 5% down payment, take out one mortgage for 80% and one for 15%.
80/10/10 -- You make a 10% down payment, take out one mortgage for 80% and one for 10%.
80/20 -- You do not put anything down, take out one mortgage for 80% and one for 10%.

Piggyback v. PMI

Because there are some “pros” to piggyback loans, it necessarily follows that there are some “cons” as well. First of all, consider the situation from the lender who will provide you with a 10 or 15% loan. In order for it to be “worth it” for this lender, you probably will have quite a high interest rate attached to your loan.

Second, keep in mind that having two mortgages not only means dealing with two interest rates (probably both of which will be higher than normal), but also two sets of fees as well. It might very well be that the fees associated with both loans will make them more expensive than one loan with PMI would be.

Third, sometimes piggyback loans have a balloon payment built into the agreement. A balloon payment is a large payment toward the end of the mortgage term that is much greater than the monthly payments up until that point. It can be very difficult to plan for balloon payments.

All of these points are things to keep in mind to determine whether or not a piggyback loan is a wise financial decision for you, or if it actually would be more affordable to just pay for PMI after all. An alternate, but relatively rare, option is to finance a loan that self-insured. Speak openly with a mortgage expert to determine your least costly mortgage option. In this day in age, not having a 20% down payment does not mean that you cannot find a mortgage for your new home.