Private mortgage insurance–referred to in the industry as PMI–is often a requirement for homeowners needing to borrow more than 80 percent of a home’s value. Notoriously expensive, PMI is widely unpopular with consumers. However, many lenders require the purchase of PMI to protect against losses resulting from potential foreclosure.
One way to avoid PMI is, as stated above, to provide a cash down-payment of 20 percent or more. Some ways individuals manage this is to borrow against 401k plans or stock portfolios. However, for many people, this is simply not an option.
For people who are unable to put down 20 percent but are reluctant to purchase PMI, another alternative is newly available and becoming increasingly popular. Referred to as a “piggy back loans,” these are second mortgages that are taken out at the time of home purchase. Piggy back loans typically “bridge the gap” between the amount the first loan covers, and the balance needed to meet 20 percent. Popular combinations are 80-10-10 (80 percent first loan, 10 percent “piggy back,” 10 percent down), 80-15-5 (80 percent first loan, 10 percent “piggy back,” 5 percent cash down), or 80-20-0 (100 percent financing, no cash down).
Interest rates are higher for piggy back loans. Nonetheless, many financial advisers claim that homeowners who opt for piggy back loans come out ahead in the long run because of the money saved from not purchasing PMI. Another major advantage of piggy back loans is that, unlike payments made for PMI, 100 percent of the interest can be tax deductible.