Piggyback Loans vs Private Mortgage Insurance PMI

For decades, standard practice had bankers requiring a 20% downpayment for mortgage loans. Private Mortgage Insurance (PMI) was then created as a form of insurance for those borrowers who could not come up with the 20% down.

PMI usually allows a borrower to borrow up to 90% of the loan but take out an insurance policy which will pay the bank foreclosure costs if you default on the loan. Usually PMI is about $55 per $100,000 per month.

Recently, mortgage lenders have allowed borrowers to borrow 80% loan to value, then take out a second loan for the remaining amount, minus any downpayment. This second loan is commonly referred to as a piggyback loan and is often times at a floating rate comparable to second loans.

With PMI fees plus the regular interest fees, you’ll continue to pay monthly until your loan to value amount drops below the 80/20 ratio. With the piggyback loan, you’ll pay this over a set payment schedule in addition to your monthly mortgage. Piggyback loans also act similar to Home Equity Credit Lines in that you can borrow against this line of credit as you pay it off.

Piggyback loans may provide you with more flexibility in loan options, but you may pay more over time, depending on the flucations of the adjustable rates. PMI fees also add up depending on how long you’ll require the insurance fees.

A conservative strategy suggests that you avoid both PMI and Piggyback loans and raise the 20% downpayment. But in more agressive strategies in expensive housing markets, PMI and Piggyback loans provide flexibilty. Piggyback loans have been the popular choice of late, but PMI might be a smarter alternative in certain cases where you can pay off the PMI requirement quickly.