One of the most common ways that homebuyers can avoid paying private mortgage insurance or PMI is by getting a piggyback home loan, also referred to as the 80/10/10 mortgage. These numbers indicate the entire purchase price, but take note that these are not automatically fixed, such that your lender could give you a 75/15/10 or 80/15/5, or some other combination he or she deems fit, provided that your primary mortgage is still under or at 80%.
Decoding the numbers on a piggyback home loan
Essentially, your lender would give you a primary or main home loan and a secondary loan or HELOC (home equity line of credit) equivalent to 80% (or 75%) and 10% (5%), respectively, of the value of your home. Your second home loan “piggybacks” on your first one to make you qualified for a bigger mortgage with no PMI and less down payment, explains Altius Mortgage Group and other mortgage companies in Salt Lake City.
The first number, 80%, would be covered by your lender and should be equivalent or less than 80% to cancel out PMI. The second number, 10%, is the purchase price percentage on your second loan. It doesn’t come with PMI but has a higher interest rate than your first home loan. The last number, 10%, is the amount you need for the down payment.
Should you go with a piggyback home loan?
If you could afford a 20% down payment, it might make more sense to go with a mortgage with PMI because once the balance of your loan is at 80% of your home’s value, you could request your lender to cancel your PMI payments. This could be less costly than opting for a second loan with a higher rate.
Likewise, if you could only afford a down payment that’s lower than 10%, your second loan’s interest might be significantly higher and therefore offsets potential savings from not paying PMI. Additionally, consider if you are eligible for tax deductions on your PMI payments or interest from your second home loan.
That being said, do your research, weigh all the pros and cons, and find a mortgage lender that could offer this type of mortgage if it makes sense for your specific circumstances.