PMI Alternatives

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Conventional loans with equity or a down payment of less than 20% will normally require private mortgage insurance (PMI). However, in many circumstances there are advantageous alternatives to traditional PMI.

 

The factors you will need to carefully consider are your estimates of:

  • length of time you will probably live in the home
  • interest rate of your loan
  • appreciation rate of homes in your area

‘Piggyback’ Home Loans
 
Piggyback loans, sometimes called 80/10/10 or 80/15/5 loans feature the ability to avoid private mortgage insurance (PMI) when the down payment or equity in your home is less than 20% of the value. By combining a first mortgage and a ‘piggyback’ second mortgage, you may reduce your monthly payments below a traditional mortgage loan with PMI.

‘Piggyback’ loans are available with a down payment of as little as 5 to 10% and may be used with most fixed rate and adjustable rate loans.

 

Advantages:

  • possible lower mortgage payment (no PMI payment)
  • possible tax deductibility of the interest versus the nondeductible PMI payments (consult an accountant regarding your individual circumstances)
  • lower interest rate (by using a piggyback loan you may be able to keep the first mortgage amount below the jumbo loan limit and take advantage of lower conforming rates versus jumbo rates)
  • The flexibility of a home equity loan as a second mortgage

 

Disadvantages:
 
There are two key factors to consider with piggyback loans:

  • The length of time that the loan will be outstanding
  • Slightly higher cost since there are two loan closings
  • The home’s appreciation rate (you may be able to drop PMI if the home appreciates fast enough to reach 80% LTV)

 

The total payment of the first mortgage and the piggyback loan may be lower than a single loan with PMI. However, you can have PMI eliminated on a loan by either:

  • paying the loan down so that there is 20% equity or
  • obtaining a new appraisal to demonstrate that you have at least 20% equity. (Please confirm all the requirements with your current loan servicer.)

 

Of course, if the home has appreciated enough for you to have 20% equity, you could refinance the first and second loan and be left with one new loan without PMI.

 

Another Option

 

Self-insured mortgages or PMI Buyout
Another alternative to a traditional PMI loan is to build the lender’s additional risk into the loan itself. The loan will have a higher interest rate but will not require traditional PMI. The lender for the loan covers the risk internally.

 

Advantages

  • While the interest rate on the loan will be higher than the same loan with PMI, the payment will usually be slightly lower.
  • Since home interest expense is deductible, the after tax cost of the self-insured loan is lower. (Certain self-insured products allow for a reduction in the interest rate when the loan has paid down to 80% of the original value.)

 

Disadvantages
If you live in the home long enough and/or the appreciation rate is high, you may be able to have PMI removed from the loan early. By eliminating PMI you will have a lower payment than a self-insured mortgage. Of course, if the home has appreciated enough for you to have 20% equity, you could refinance to a loan without PMI.   If this does happen, you are still stuck paying the higher interest rate if you buyout PMI with a higher rate.