Any borrower that cannot meet the 20% down payment criteria on the value of a home mortgage will likely have to pay private mortgage insurance. These private mortgage premiums can reach as much as 1% of the total value of the mortgage. This insurance protects the bank's investment, as their liability is covered should the borrower default on the home and they are unable to sell the foreclosed property. This private mortgage insurance coverage will meet their costs. While this insurance benefits the bank or lending institution, the borrower is stuck paying for it, and many people are seeking alternatives to the expensive insurance.
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One popular and increasingly common alternative is a piggy back loan. This type of loan gives the borrower the money needed to meet the 20% down payment criteria and avoid the private lender insurance. Home buyers with as little as 5% of the property value down, should be able to qualify for a piggy back mortgage.
The interest rates on the second loan or piggy back mortgage will usually be 1 or 2 percentage points higher as the banks consider these loans as riskier propositions.
So is a piggy back loan the right choice for you?
There are two factors to consider when evaluating between private mortgage insurance and a piggy back loan. The likely future of your home's value, and the tax implications in your area.
If your home's value gains slowly, or stays relatively stable in value, then you will pay off your private lending insurance for a longer period than if your home's value increases quickly. The greater the equity increase, the quicker you will satisfy the bank's 20% ratio criteria. If you expect your home's value to rise quickly, then private lending insurance may be the more affordable choice of the two options.
You also have to consider the taxation implications. Until recently, a piggy back mortgage was often the better bet, as these mortgage payments were tax deductible, while private mortgage insurance premiums were not. New legislation enacted in 2007 has made the payment of private mortgage insurance tax deductible in some areas, depending on your income. You should speak with a taxation professional to weigh the potential tax savings of the two options in your State.
Some people will take out piggy back mortgages on very expensive houses to keep the total value of their home mortgage below the "jumbo" level. Once a home mortgage exceeds 300 000 dollars, many banks will charge an increased interest rates. By piggy backing part of the cost with a second mortgage, you may be able to avoid this increased interest payment.
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