Put More Money in Your Piggy Bank with a Piggyback or LPMI Loan
If you haven’t done any research on the mortgage process, private mortgage insurance (PMI) has no meaning to you.
PMI is required on all loans that have less than 20% down.
The insurance is a safety net for the lender in case you are unable to pay the mortgage. The insurance has a yearly premium — much like auto or homeowner’s insurance — that will be added cost on top of your mortgage payment. The premium is paid monthly.
You’re probably saying to yourself, I don’t have that kind of money but, how can I still get that dream home and avoid paying that PMI premium?
There are two options below that answer that question for you. Each option may allow you to have a lower monthly mortgage payment but you will have a slightly higher interest rate. This in turn would mean that not necessarily the lowest interest rate means the lowest monthly payment.
Of course, all loan programs are credit score driven and you may or may not qualify.
Option No. 1: Lender Paid Mortgage Insurance Loan
Lender Paid Mortgage Insurance isn’t truly a good name for the loan as the lender doesn’t really pay the mortgage insurance premium for you.
The premium either gets paid upfront as a lump sum or you would pay a larger monthly mortgage payment in the form of a higher interest rate.
The lump-sum approach gives the lender an amount they think will cover the costs of the mortgage insurance based on the money you gave them and the details of the home you are buying.
The higher interest rate route yes means a higher monthly payment. However, it may still be cheaper than going with a regular loan where the PMI would be higher.
Option No. 2: Piggyback Loans
Piggyback loans or also known as 80-10-10 or 80-15-5 loans are a combination of things.
These loans have borrowers receive a first and second mortgage at the same time that makes up for either 90% of the home purchase (80-10) or 95% of the home purchase (80-15). The buyer would then put down the remaining amount needed (10% or 5%).
For example on a $250,000 loan using the 80-10-10 option, the first mortgage would be $200,000, the second mortgage would be $25,000 and the buyer would have to put down $25,000.
Using the same $250,000 loan using the 80-15-5 option, the first mortgage would be $200,000, the second mortgage would be $37,500 and the buyer would need to put down $12,500.
Piggyback loans eliminate the need for PMI as lenders look at the second mortgage and the down payment as the full down payment thus having the necessary 20% down.
So, if you want to avoid the PMI and don’t have 20% to put down these are some options for you. However, you should always reach out to a mortgage broker to see what the best option is for you.
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