Conventional
mortgages with equity or a down payment of less than 20% will normally
require private mortgage insurance (PMI). However,
in many circumstances there are advantageous alternatives to traditional
PMI. The
factors you will need to carefully consider are your estimates of:
Length of time you will probably live in the home
Interest rate of your loan
Appreciation rate of homes in your area
Piggyback alternative
Piggyback loans feature the ability to avoid private mortgage insurance (PMI) when the down payment or equity in your home is less than 20% of the value. By combining a first mortgage and a piggyback second mortgage, you may reduce your monthly payments below a traditional mortgage loan with PMI.
Piggyback loans are available with low to no down payment and may be used with most fixed rate and adjustable rate loans.
Some of the advantages of a piggyback
loan are:
Possible lower mortgage payment (no PMI payment)
Possible tax deductibility of the interest versus the nondeductible
PMI payments (consult an accountant regarding your individual circumstances)
Lower interest rate. By using a piggyback loan you may be able to
keep the first mortgage amount below the jumbo loan limit and take
advantage of lower conforming rates versus jumbo rates.
The flexibility of a home equity loan as a second mortgage. This will
allow you access to the equity in your home.
Some of the disadvantages of a piggyback
loan are:
Slightly higher closing costs, since you are now closing on two loans
The
homes appreciation rate. The total payment of
the first mortgage and the piggyback loan may be higher (in the long
run) than a single loan with PMI. If your house appreciates quickly,
you may be able to drop PMI sooner than expected.
PMI buyout alternative
An alternative to a traditional PMI loan is to build the lender’s additional risk into the loan itself. The loan will have a higher interest rate but will not require traditional PMI. The lender for the loan covers the risk internally.
Some of the advantages of PMI Buyout
are:
While the interest rate on the loan will be higher
than the same loan with PMI, the payment will usually be slightly
lower.
Since home interest expense is deductible, the after
tax cost of the self-insured loan is lower. (Certain self-insured
products allow for a reduction in the interest rate when the loan
has paid down to 80% of the original value.)
Some of the advantages of PMI Buyout
are:
If
you live in the home long enough and/or the appreciation rate is high,
you may be able to have PMI removed from the loan early. By eliminating
PMI you will have a lower payment than a self-insured mortgage. Of
course, if the home has appreciated enough for you to have 20% equity,
you could refinance to a loan without
PMI. If this does happen, you are still
stuck paying the higher interest rate if you buyout PMI with a higher
rate.
