PMI or Piggyback Mortgage?
I’ve started the daunting task of trying to understand the intricacies of home ownership, real estate, and mortgages the last few months because I’ve decided I may want to stay in the area a number of years. This also happens to be the inaugural post in the “In Search of a Home” category, so be gentle on it.
Several of my friends have recently purchased homes in the area and two out of the three haven’t been able to put down 20% (the necessary amount required to avoid private mortgage insurance, or PMI). The two that couldn’t make the 20% down payment relied on a piggyback mortgage, or another loan at a higher rate for whatever they were short on to avoid the PMI.
So today on Bankrate.com (an invaluable resource), I read an article titled “PMI industry fights back against piggyback loans” which includes a comparison between the piggyback loan versus the PMI. Boiling it down to its essentials, PMI is getting it’s teeth kicked in and has little going in its favor for someone in my situation.
Bankrate’s assessment? Short run go with piggyback, long-term go with PMI. The reasoning is that your home is going to appreciate and then you’ll cancel the PMI. However, in their example, if you cancel the PMI after exactly two years, it’ll take five to ten years to make it all back. So in essence, long-term means five to ten years. Piggybacks have all sorts of things going for it like the interest being tax deductible (it’s still a mortgage on your home) and a lower overall monthly payment, which is enticing many homebuyers. The downside? The additional closing costs of another loan, which may or may not be significant.
Sounds like a piggyback is what I’ll be looking for unless I can conjure 20% down. Know any cheap homes in the Baltimore, Maryland area?
7 responses to “PMI or Piggyback Mortgage?”
tim responds:
Posted: March 7th, 2005 at 4:37 pm
I will have a great deal on a house in 18 mo - 3 years from now, I will sell you mine!
Omar responds:
Posted: March 8th, 2005 at 10:30 pm
I’m not 100% sure about Baltimore, but I know “cheap homes” and “Maryland” don’t usually go together… well, at least near Silver Spring/College Park.
Best of luck! And thanks for the birthday wishes.
Caitlin responds:
Posted: March 20th, 2005 at 7:35 pm
We ended up getting quite creative with our financing and we’re in the Boston area (talk about crazy). We were given the choice of doing our “piggyback” as a separate fixed loan OR as a HELOC (home equity line of credit) - not sure if this was due to our good FICO or something else. So by choosing the HELOC we didn’t have a whole other set of closing costs and we had an interest only loan that saved our butts during our uber-lean year of 2003 - while I was unemployed and my partner was underemployed we only had to pay the interest. We have since refinanced, but the 80/15/5 with the 15% HELOC was a good deal and helpful…keep and eye out for that opportunity (though I highly recomment paying it down *like* its a fixed rate!) Good Luck!
Todd Derscheid responds:
Posted: April 2nd, 2005 at 11:00 pm
We bought a small townhouse in Houston (well under a hundred grand for 1586 square feet) with an FHA loan four years ago. Our excellent credit got us a decent rate on a single loan. Since we went with PHH mortgage (the mortgage arm of military-spawned insurance giant USAA), their customers’ lower-than usual rate of default made PMI a better option overall than a piggybacked loan, or so it seemed at the time.
I took several business trips where I received a Per Diem. Anything extra was applied straight to the mortgage.
We refinanced a year and a half ago with our local credit union, down to 4.5% but resetting our clock to 15 years. The credit union handed us off to ABN AMRO. Overall, the reduction in our payment has allowed us to feel free to pay extra. That money probably ought to go toward a Roth, but all our funds have tanked or gone nowhere. Nothing is ever easy… Currently, I think we’ll be mortgage-free on June 1, 2017.
» Closing Costs and Annoying Fees (and I made an offer on a house) by Blueprint for Financial Prosperity responds:
Posted: April 18th, 2005 at 8:14 am
[...] first mortgage, 10% second mortgage, and 10% down. The reason for this would be for me to avoid paying private mortgage insurance (PMI) which would cost $67/month ($8 [...]
» Second Mortgage Paid Off by Blueprint for Financial Prosperity responds:
Posted: December 22nd, 2005 at 2:15 pm
[...] Almost six months ago, I purchased a house in one of the elegant suburbs of Baltimore, Maryland and elected to apply for a first and second mortgage instead of a larger first mortgage and PMI (Private Mortgage Insurance), I discussed the reasoning in an article explaining piggyback mortgages. Some lamented the fact that I opted for a higher interested rate (7.5% fixed on the 2nd mortgage compared to 5.75% on the 1st) but I felt that it was the best decision. Fast forward six months and with the 2nd mortgage paid off - it appears that, at least marginally, it was the better decision. At the very least, I avoided paying 6 months of PMI for no reason. [...]
credit repair responds:
Posted: September 30th, 2006 at 9:24 pm
You did very well getting low 7.5% on the second mortgage, even in 2005, but normally the best way would be going for LPMI, which is Lender Paid Mortgage Insurance. You get one mortgage and depending on the program, credit and down payment, your rate will be somewhat higher. It is tax deductible and you have one loan. Here is the page explaining this concept in detail. http://www.bad-credit-advisor.com/lender-paid-mortgage-insurance.html.