Piggyback Loans Can Solve PMI Riddle

March 9th, 2006

When buying a new home without a 20 percent downpayment, many borrowers are forced to pay for costly private mortgage insurance or PMI. Although not all mortgage loans require PMI in these situations, any mortgage that is backed by Fannie Mae or a similar government type loan will require PMI payments.

One alternative to paying PMI is to setup your mortgage in the beginning as a piggyback loan. Also referred to as 80/20, 80/10/10 or 80/15/5 mortgage loans, piggyback loans are a good alternative to PMI payments.

So what exactly is a Piggyback loan? It’s a second mortgage that you close simultaneously to your first mortgage for the remainder of the home’s costs in which you do not have downpayment money.

For example, let’s say you’re buying a $100,000 home. You have $5,000 to use as a downpayment and you want to avoid PMI. You would apply for an 80/15/5 piggyback loan. At closing, you would have a first mortgage for $80,000 (80% of your home’s value), a $15,000 second mortgage (15% of your home’s value) and you would invest 5% of your own money which would become equity.

So what if you don’t have 5% to put down? This is where you would get an 80/20 piggyback loan. In this case, 80% of the loan is on your first mortgage and the remaining 20% goes on your second mortgage. You would have no equity in this case.

For more information on PMI, check out AmericanLoanShopper.com at the link below:

http://www.americanloanshopper.com/pmi/pmi.htm

Entry Filed under: How to Avoid PMI, General