Piggyback Mortgage
If as a home buyer, you don’t put at least 20% down on your home, you will probably have to pay what’s called private mortgage insurance (PMI). Although you pay the premium, it’s the lender who is protected in case you default on the mortgage.
An alternative to PMI is a piggyback mortgage.
What is a Piggyback Mortgage?
A piggyback mortgage is a second mortgage that parallels the first one. Usually the first loan is for 80% of the home value and the second is for 10%. The buyer must come up with the 10% down. This way the PMI is avoided.
Piggyback Mortgage Advantages
Some of the advantages are:
- Both loans are tax deductible whereas PMI is not
- You don’t have to pay PMI
- It could give you flexibility if the second loan is set up as a home equity line of credit
Piggyback Mortgage Disadvantages
Some disadvantages are:
- It may not be financially worthwhile since the interest rate is higher on the second mortgage
- If the home value rise quickly, the PMI will be dropped but the second mortgage will not
- Qualifying for a piggyback mortgage is more difficult
- Having two loans on your home make it almost impossible to take out additional home equity loans in the future
If you’re considering this option, make sure you do a thorough cost benefit analysis to see if a piggyback loan is the best option for you.
Steve Wyrostek -HomeLoans.org Expert A 20 year plus veteran of the insurance industry, Steve managed departments in the personal and commercial lines areas of major insurers. He’s familiar with how insurance—ranging from boat to workers compensation—works.
