PMI or Piggy-back. Which is Better for Me?If you are like most Americans and don't have the 20% down payment that most conventional loans require, then you will likely be required to pay mortgage insurance on the loan for your new home. Also, known as PMI, private mortgage insurance will usually cost about half of a percent of the total amount of your interest rate. For example, if you have a $200,000 mortgage, you should be prepared to pay around $83.00 per month. To offset this additional cost for new homeowners, there is something called a piggyback loan. In a nutshell, this is a second mortgage on your home which will cover the 10-20 percent down payment if you do not have the cash to put down on the loan. Since there is no loan on the property which is more than 80% of the total value of the home, then private mortgage insurance (PMI) is not required. In most circumstances the interest on a piggyback loan can be deducted from the borrower's taxes and because of this, you may be able to save money by taking out a piggyback loan rather than having the additional cost that comes with PMI. There was a time when mortgage insurance companies were worried about losing so much of their business to these piggyback loans, however there are a few reasons why that they are no longer in this situation. Firstly, since 2004, the prime rate, which is most likely the rate that a person will get with these loans has nearly doubled! Secondly, a law was passed that allowed PMI payments to become deducted from the borrower's taxes. Between both of these things, PMI has made a comeback, specially when getting California mortgages, Florida, Washington mortgages or even Georgia where housing prices are higher than the rest of the nation. To make things very clear, an example is to follow: $250,000 loan $25,000 down payment (10%) 30 Year fixed rate @ 5.75% If you have a loan for 90% of the property's value which is $225,000 you will be required to pay PMI so your breakdown will look something like this: Monthly Mortgage Payment will be $1,313.04 Monthly PMI will be $93.75 Which makes a total payment of around $1.406.79 OR: You could take out a mortgage for 80% of the property's value, which is $200,000 and have a second mortgage (the piggyback loan) for $25,000 which will make your breakdown look like this: Monthly Mortgage Payment: $1,167.15 Monthly Piggyback loan amount: $192.23 @ 8.5% For a total monthly payment of $1,359.38 In this situation, without adding in any fees that could be associated with the piggyback loan, option two is clearly a money saver. Option 1 still does have its advantages. Since you can possibly deduct the PMI premiums from your taxes, you may see a larger return. The difference between these two scenarios is so little, that the slightest change in the interest rate could change the calculations completely. For a very long time now, PMI companies have been trying to get some laws passed that will help themselves, but more importantly the people that the service. Those recently passed laws allow the policy holder to deduct PMI premiums from their income taxes assuming that their income is less than $100,000 and is only applicable to those whose homes were bought and/or mortgaged in the year 2007. The companies are not sure, but do expect the laws to continue in the coming years. A piggyback loan is definitely an option that you should spend some time discussing with your loan agent if you do not plan to purchase your home with at least a 20% down payment. |
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