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PMI vs. The Piggyback Loan
By EchoBay Loans Staff Writer

Are you a first time homebuyer with the sudden realization that a 20% down payment is a huge chunk of change?

Do you wonder if you will ever have enough money to be able to buy a house?

Do you know you can afford it because your current rent is more than the payment of your dream home?

For many people, especially those buying their first home, the house payment is not the problem. It is the required down payment to avoid PMI that causes headaches. Before getting too stressed out, let's examine the options that are available.

Mortgage Loan plus PMI
We've all heard about 100% financing or buy your dream home with just 3% down. But when you visit your mortgage lender, the keys to your new home are not so easily attained.If you have good to excellent credit, it is possible to finance a large portion of the purchase price of your home, even 100% of the price. In some cases, you can even add in the closing costs on top of 100% financing. But the mortgage lenders have to protect themselves and they do it through PMI or private mortgage insurance.

PMI provides insurance that will offset the risk to the lender if you fall behind on payments. The most important thing to realize about PMI is that as the consumer, you are provided no protection. PMI is strictly for the benefit of the lender but it is at your expense. That expense can be affected by a number of factors including the total loan amount and terms of the loan. Generally, homeowners can expect to pay $50-$120 per month for PMI. The payment for your PMI is generally added into your monthly house payment to the lender. Because of this, it will be considered in your debt ratio. This means, in some cases, you may have to look for a less expensive home so you can afford the entire payment. The good new is that when you have established 20% equity in the home, many lenders will automatically cancel your PMI.

By utilizing the benefits of PMI, many people are able to realize their dream of home ownership much sooner. But what else is available for you?

Piggyback Loan
Another option to avoid the 20% down payment and PMI is called a piggyback loan. This loan is taken out at the same time as your mortgage. Effectively, you are borrowing your down payment. This loan can be structured in a variety of ways: 80-10-10 (80% financing on first mortgage, 10% piggyback loan and 10% down) or 80-20 (80% financing on first mortgage and 20% piggyback loan). The piggyback loan is generally at a higher interest rate with different terms than your first mortgage. In most cases, the piggyback will be set up as a home equity line. These loans have an interest rate that is tied to the Wall Street Journal Prime (WSJP) rate plus percentage points. For instance if WSJP is 5%, the lender may have an interest rate of WSJP+2% resulting in a rate of 7%. It's important to realize that this rate fluctuates and can affect your payment greatly depending on how much it changes.

Piggyback loans are not for those who live paycheck to paycheck or who have a great deal of monthly debt. It can make your total house payment a significant amount more and this will be considered during the approval process on the loan. It is, however, possible to save money this way versus paying PMI. With many borrowers, it is more expensive to pay PMI each month than it is to pay the additional loan payment. Also, the interest on the piggyback loan will be tax deductible if you itemize where PMI is not.

Many borrowers who utilize the piggyback loan have at least part, if not all, of their down payment in savings or other investments. They choose to pay their down payment over time through a piggyback loan rather than draining their savings and losing valuable interest.

It is important to look at the pros and cons of each situation as you buy your home. Your mortgage lender can provide detailed payment information that can help you decide on the wisest decision for what will likely be the largest investment of your life. Good luck in the process and enjoy living the American dream of home ownership.


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