Many homebuyers seek ways to avoid Private Mortgage Insurance (PMI), which adds to the cost of their monthly mortgage payments. One alternative gaining popularity is the piggyback loan.
What is PMI and Why Avoid It?
PMI is insurance that protects the lender in case the borrower defaults on the loan. It’s typically required when the down payment is less than 20% of the home’s purchase price. For a $300,000 home, a 10% down payment would mean an additional $150 per month on average.
Understanding Piggyback Loans
A piggyback loan is a second mortgage used to cover part of the home’s purchase price. It’s often structured as an 80-10-10 loan, where the borrower puts down 10%, takes out a mortgage for 80%, and uses a second loan for the remaining 10%. This setup allows borrowers to avoid PMI.
The Benefits of Piggyback Loans
By opting for a piggyback loan, borrowers can:
- Eliminate PMI payments, potentially saving hundreds of dollars per month.
- Access competitive interest rates on both loans, especially if they have good credit.
- Enjoy tax benefits, as the interest on both loans may be tax-deductible.
Considerations Before Choosing a Piggyback Loan
While piggyback loans offer advantages, borrowers should weigh the following factors:
- Higher overall debt: Having two loans means higher total debt, which could affect credit scores and borrowing capacity.
- Interest rates: The interest rate on the second loan may be higher than on the primary mortgage.
- Qualification requirements: Lenders may have stricter criteria for piggyback loans, such as higher credit scores.
Is a Piggyback Loan Right for You?
Before deciding on a piggyback loan, consider your financial situation, long-term goals, and the terms offered by lenders. Consulting with a mortgage broker can help you explore all available options and make an informed decision.
For expert guidance on piggyback loans and other mortgage solutions, reach out to us today!
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