About Private Mortgage Insurance

Avoiding PMI with Piggyback Mortgages

Private mortgage insurance is only applicable when your LTV ratio is greater than 80% so to avoid paying PMI you must get the LTV ratio under 80%. There are three ways to do this:

1. Obtain one loan and put a downpayment of 20%.
2. Obtain one loan and agree to a higher interest rate.
3. Obtain two loans, a first and second mortgage.

The first choice is obvious and you wouldn’t be here if you could put a downpayment of 20%. The second option is less common than the first or third but you could try to negotiate with your lender and agree to accept a higher rate (typically up to a percent higher) on your loan in return for not having to have PMI.

The third is likely your best option and the second mortgage is often called a “piggyback mortgage.”

Advantages of a Piggyback Mortgage:

The primary advantage is that you avoid PMI payments, which are not tax deductible and typically must be paid for an entire year before cancellation. Also, the total payment on two mortgages is usually lower than on a single mortgage with PMI - so it costs you less overall.

Disadvantages of a Piggyback Mortgage:

Since first mortgages get the first right to seize on your home, second mortgage lenders are accepting greater risk since they don’t have your house as collatoral and thus will charge you a higher interest rate. Personally, when I purchase a home in May 2005 I went the route of obtaining a second mortgage instead of purchasing PMI after much research in the matter. The rate of my first mortgage was a svelte 5.75% but the rate on my second was 7.5%, nearly 175 basis points higher, a significant difference.

Introduction to Private Mortgage Insurance

If you’re ever read anything about mortgages then undoubtably you’ve stumbled across the acronym PMI, short for Private Mortgage Insurance. When a borrower must borrow more than 80% of the value of the home from a single source then the lender typically requires that the borrower get PMI and pay for the premiums.

Historically, prospective homeowners were able to put down a 20% downpayment on a home when home prices were more realistic. With the recent and rapid appreciation of many homes, this is no longer possible for many families and single young professionals. What was once uncommon, 100% financed home purchases, is now commonplace and the number of homeowners who have private mortgage insurance has increased significantly.

When the Loan To Value (LTV) is greater than 80%, calculated by taking the loan amount and dividing it by the appraised value of the home, then you will be required to purchase private mortgage insurance. How much the PMI costs will depend on a variety of factors including your credit score, your actual LTV %, your mortgage type, and more but typically cost somewhere in the one-half of one percent of your loan.

So if you have a loan for $150,000 then expect your PMI to cost somewhere in the neighborhood of $750 a year.