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Piggyback Mortgages – One of the 3 Alternatives to Avoid Private Mortgage Insurance (PMI)

If you are buying a home and not forking out a down payment of at least 20%, the chances are you will be asked to pay for the Private Mortgage Insurance (PMI). The lender wants to protect himself against the borrower defaulting on the loan. But the cost of such a guarantee, PMI, is paid monthly by the borrower and not the lender.

Since the human mind is genetically wired to “get everything for nothing,” a solution had to be found to detour around the pesky PMI.

One solution kicks in automatically. According to the law, if you closed on your loan on July 29, 1999 or later, and if the amount you still owe on your loan falls below the 78% of your purchasing price, then PMI is not needed anymore.

A second solution is the Lender-Paid Mortgage Insurance (LPMI) in which the lender, and not the borrower, “pays upfront” the cost of the insurance but the total amount is rolled into the mortgage and amortized over the whole life of the loan. Thus its final cost is a lot more for the consumer. Not recommended.

Another solution to avoid the PMI is to obtain a Piggyback Mortgage.

The piggyback is actually a second mortgage that closes together with the first mortgage in such a way that the percentage of the first mortgage within the total loan drops down to 80% and hence the need for PMI can be circumvented legally.

There are a couple different versions of piggybacking. The most common is the “80-10-10” mortgages in which the first mortgage makes up the 80% of the total mortgage, the second “piggyback” loan makes the 10%, and the customer provides the remaining 10% as down payment.

There are 80-15-5 and even 80-20 versions in which no down payment is required.

When you pay PMI, you can not deduct it from your taxes like the interest paid on a first mortgage. But the interest you pay on your piggyback (second) mortgage is also tax deductible.

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