|Question: Can I use a piggyback mortgage as an alternative to private mortgage insurance (PMI)?|
If your down payment is less than 20 percent of the purchase amount when you buy a house, the lender will likely require that you buy PMI to ensure repayment of the loan. To avoid paying monthly PMI premiums, consider getting a piggyback mortgage, sometimes called an 80-10-10 mortgage. In a piggyback transaction, a bank or other finance company traditionally lends 80 percent of the purchase price, and the buyer makes a down payment of 10 percent. The remaining 10 percent is financed with a second mortgage. The interest rate for the second mortgage is usually significantly higher than for the primary loan.
The cost of PMI may not be as much of a concern as it has been in the past. That's because federal law now requires that a lending institution cancel PMI when you have reduced the principal portion of your loan to 78 percent of the purchase price. Until recently, PMI was removed from a mortgage agreement on a case-by-case basis and often was paid by the borrower for the life of the loan. By comparison, a piggyback mortgage could be paid off, giving borrowers some control over how long they had to pay added monthly costs. In addition, PMI premiums for mortgages issued between January 1, 2007 and December 31, 2010 are now tax deductible for certain taxpayers, whereas formerly, this was not the case.
A piggyback mortgage may still make sense, but you have to calculate which option is best for you. Keep in mind that some second mortgages require a balloon payment of all the outstanding principal at the end of the term, and that you may not be able to take out further mortgage loans until the piggyback mortgage is paid off.
You might also consider some of the alternatives to both piggyback mortgages and PMI. If you have built a good relationship with your current financial institution, it may approve a portfolio loan for you. A portfolio loan is one that the lender keeps in-house rather than selling, so the lender may waive PMI, depending on your financial history. Another alternative is to find a lender that offers a slightly higher-than-market interest rate in exchange for waiving PMI. However, you will end up paying the higher interest rate for the life of the loan.