Alternatives To Private Mortgage Insurance (PMI)

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 lenderís 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.



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