When you finance the purchase of a home, in most cases, you will either have to make a sizable down payment or take out a private mortgage insurance policy (PMI). The choice is cut and dried for most borrowers.
But in some cases, if you want to have the most refined control over your costs, you may be able to find another alternative to PMI. If the numbers add up, you may be able to take out a piggyback loan to top up your deposit and save money over the life of the loan.
The Piggyback Loan
A second or junior loan is that because it takes a subordinate position in its claim on your assets, should you default on the payments. Your primary or first lender can claim your assets in foreclosure and sell them. Any amount that remains, after the recovered first loan, goes to repaying subordinated obligations, which means more risk and higher interest rates for junior loans.
In practice, a second often means a home equity line of credit (HELOC). PMI does not contribute to repayment, and you can potentially pay a second back more quickly, reducing the interest when otherwise you would still lack the equity to escape the need for a policy. A small second with a term of five years may be the right ticket. If your first loan is for thirty years, you may still have a high enough balance outstanding that you require PMI for more than five years.
Finding The Right Tools For Any Situation
Another instance that this strategy might be useful is when using a second mortgage will enable you to avoid a high-priced jumbo loan. If your loan would take you over the conforming limit, a jumbo loan will have a higher rate of interest and put additional requirements on your loan. One remedy would be to use a second loan to keep within conforming loan limits, saving money for you in the long-term.
The question is how to make up the equity in your home and having an adequate down payment rather than a loan that requires private mortgage insurance and the added cost. There are other options, for example, if you are a qualifying veteran, VA home loans have no requirements for insurance, regardless of the size of the deposit.
Weigh Your Options
Using second mortgages to save costs is just one of the many options you have in home finance. Connect with your lending professional to work out the numbers. Using a piggyback loan to circumvent the requirement for PMI is creative and proactive, it gives you an advantage as long as you first set it up in a viable plan and then you discipline yourself to stick to the plan.
Deciding to use a loan to avoid the obligation for PMI is a matter of determining the value of the trade-off regarding the risk. You might be able to reduce your payment obligation regarding the total payments. However, it is important to remember that you can always cancel your PMI but a second loan is an enduring commitment; you have to pay until the debt has been satisfied.