How to Use Piggyback Mortgages to Avoid Private Mortgage Insurance

Posted by  on Apr 16, 2009
 
How to Use Piggyback Mortgages to Avoid Private Mortgage Insurance

A home is a great investment for your life because of the overall appreciating financial value as well as the secure location to live for as long as you want. The problem occurs when the cost of mortgage payments outweighs the overall investment your going to make on the house. The question comes can you still get a reasonably mortgage nowadays with lender price gauging? And the answer is yes.

What Lenders are Doing and Why

The problem with borrowers is that many can’t sufficiently afford to pay there monthly payment due to some factors that were unforeseen, including a rate increase or just random problems due to life. After this the borrower would default on their loan and leave it to the lender to regain any lost money.

Now there are private mortgage insurance companies coming to rescue the lender from there losses. For borrowers who cannot afford a down payment, a lender can require they purchase private mortgage insurance. About .20% to .90% of the overall loan value will need to be paid until the monthly insurance payment is caught up. However some insurance companies force the borrower to pay the lender for a certain amount of time no matter how much is already paid, which can lead to a very high cost to the borrower.

What You Can Do to Prevent This

If you are trying to avoid private mortgage insurance, the best option would be to save up your down payment well in advance to show lenders you are stable with money and trustworthy. If that is not a possibility, you can try a piggyback loan in order to finance your mortgage.

The idea of a piggyback mortgage involves taking out 2 loans to purchase your home. One loan is the normal mortgage for the house, the other loan is smaller and covers the down payment, allowing you to skip private mortgage insurance.

To get started ask your lender about this practice and about different loan plans they offer along these lines. They sometimes are called 80/20 or 80/10/10 loans. Although they come from the same person they involve two separate loans and you must pay separately for them each month.

Is This a Good Idea?

The ideal when buying a home is that you have all the money saved up for a down payment, but often this is not realistic. The piggyback loan helps you get a house right away in the market where house prices fluctuate dramatically and make it hard to buy. If you have money saved but not enough, you could invest it in an interest earning account to help you with future payments.

With mortgage insurance you only have a few years to pay back the loan and in that short time the money paid may not be a big deal when comparing them with piggyback loans. But overall piggyback loans may definitely be a viable option.

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