Buying a Home: PMI vs. Piggyback Loan
So we are buying our first place—very exciting. But now we have to decide between a few options of how we’re going to finance it.
Only one lender is offering the so-called “piggyback” loan, while the rest only offer a conventional loan with PMI.
Here’s the deal: when you don’t have 20% to put down (which we don’t), you have to pay private mortgage insurance (PMI). Typically, this goes for about 0.6% of the mortgage. So it can be anywhere from $90–$160 depending on your situation.
This serves as insurance for the lender basically saying “this person didn’t put 20% down so they might be a little riskier. So we’ll charge them PMI to cover our asses. Just in case.”
Once you pay off your mortgage to the point of that 20% threshold you can get rid of the PMI.
But lenders found a creative way to avoid PMI by creating two loans: one for 80% of the purchase price (which makes it seem as though you put down 20%) and another for 10% of the purchase price. The remaining 10% gets paid via down payment. This second loan is called a piggyback loan (aka 80/10/10 loan).
That second loan typically has a higher rate but the overall payment is usually some $20–$60 less than the PMI version.
Well, that’s where it gets sticky. PMI may seem annoying, but you can get rid of it pretty quickly. That second loan can take a long time to get rid of (our lender is offering it at 15 years) depending on how much extra you put in to pay it down.
On the other hand, paying PMI means you’ll have just one loan at one low rate vs. two loans at different rates. Sometimes you’ll pay closing costs on the two separate loans. And with piggyback loans you’re payments are all going towards your interest and your principal, while PMI goes up in smoke.
I’m curious to hear from the people with home-buying experience on this one: what has your experience been with these two products?