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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 [3]” 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 [4]” 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?