Buying a Home: PMI vs. Piggyback Loan


By Carlos Portocarrero

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.

Huh?

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.

Great, right?

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?


13 Responses to “Buying a Home: PMI vs. Piggyback Loan”

  • Jason Unger Says:

    We only put down 10% on our house, so we pay PMI. A second loan wasn’t even an option. With the number of people with 2 home loans contributing to the housing market collapse, it’s just not worth it.

    PMI isn’t that much, it’s tax deductible, and like you said, you stop paying it after you reach 20% equity (which you can also do by having your house appraised after a couple of years).

  • Kevin M Says:

    At least now, PMI is deductible as mortgage interest on Schedule A, it wasn’t always that way. My first 2 homes were bought with PMI, third one was piggyback, the last one we had 20% down.

    Your best bet – have your mortgage broker run all the numbers for each option, one might stand out as the best.

  • Nut Says:

    Well, I ran the numbers and they seem to push me in the PMI direction. But that’s just me.

  • Mr. ToughMoneyLove Says:

    I would go with Plan C: Wait until you have saved enough to buy with 20% down. Buying with inadequate equity and with a piggy back loan was a major contributing factor to the collapse of the real estate bubble. It’s not as if waiting will cause you to miss out on real estate appreciation – the market will likely remain flat for a good while, and many expect a second dip in the recession anyway. But I’m probably wasting my keystrokes.

  • josh Says:

    why not just use your roth to fund the rest and not waste money on pmi? you may get a better rate of return on your home than on your roth.

  • Nut Says:

    Josh: We did consider it but didn’t want to drain the Roth that significantly….not a good feeling to be dipping into that.

    I may reduce my 401k contribution down to the matching level at work and take the tax hit now instead of later when they’ll probably be higher.

  • Philip Brewer Says:

    When I bought I house I went the piggy-back loan route. (In my case, it was just a 5-year loan.)

    I particularly wanted to avoid the PMI because I’d heard a number of horror stories of banks that resisted canceling the PMI (requiring expensive reappraisals, and pushing the appraisers to low-ball the home value).

    At least with the piggy-back loan you know exactly what you need to do to get rid of it. Stagnant or declining home values could stick you with PMI for much longer than you anticipate.

  • Nut Says:

    That’s a good point Philip: with PMI you are subject to more of the unknown. However, I will get rid of PMI in five years if I make my regular mortgage payments and if my place’s value stays stagnant.

    And honestly, we got a damn good deal here so if the place’s value drops below what we paid we have more serious problems than PMI. To get rid of that second loan though? That would take an additional $3,000/year for five years to get rid of in the same time frame.

    Ouch.

  • Jean Says:

    Nut,
    Have you tried the Mortgage Professor’s site? I’ve been reading Jack’s website for years now – sharp guy with great advice on all things relating to mortgages. I ended up going with the piggy back because we’re in a high tax bracket. it’s worked out well for us. Now that we’re re-evaluating our life goals, we’re planning to pay off the piggy back next year so I can get off the corporate fast track and slow down – maybe finally get that family started.
    http://www.mtgprofessor.com/A%20-%20Second%20Mortgages/can_two_mortgages_cost_less_than_one.htm

  • Nut Says:

    Jean: Thanks for the link! I used to read his stuff on Yahoo Finance all the time! I think his one calculator is broken but the site is useful if not pretty.

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  • Kira Collin Says:

    Well, the piggyback oftentimes may be the clear winner. But not always. If you intend to own your home only a few years, the mortgage insurance might be less expensive than the piggyback. Consider also that the piggyback could be paid off while mortgage insurance could be difficult to eliminate. Your lender or mortgage broker should be able to explain the costs and tradeoffs to you, and some Web sites have calculators that can help you make the comparison between a piggyback and mortgage insurance. Research your options to figure out which choice is appropriate for your individual situation.

  • Lani Martinez Says:

    We purchased our home with the piggyback loan some years back and it has turned out to be the best option for us. We were able to qualify for an 80/20 (I realize that’s not being done anymore) and both loans are tax deductible while in many cases the PMI is not. The other benefit for us is that we will be able to pay off our smaller loan in 8 years leaving us with a lower house payment overall. I’m not saying this method is for everyone, but it has worked out great for us and I feel an option not to be overlooked if you can find a lender that still offers these types of loans.

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