Once upon a time, home mortgage lenders required a 20% down payment on a home. Now, of course, there are many more mortgage options, and some lenders will accept as little as a 5% down payment on a home. But there is a catch. To offset the risk of lending to someone who can’t reduce their liability, such home mortgage lenders require private mortgage insurance (PMI). This is insurance that is rolled into your monthly home loan payments and covers your mortgage payments if you default.

If you want to avoid PMI, but don’t have the 20% down payment, home mortgage lenders offer a creative solution: the piggyback loan. Basically, you get a loan for the amount you are missing, and use that to bring your down payment up to 20%. It is important to note, however, that your piggyback loan will inevitably have a higher interest rate than your regular home mortgage. However, the piggyback loan is considered a second mortgage, and the interest payments are tax-deductible. PMI premiums are only just now jumping on the tax-deductibility bandwagon.

For some people, a piggyback loan is helpful, allowing them to get into a home without having to pay for PMI. However, for others, PMI is actually a more cost-efficient choice. Here is a calculator that can help you figure out whether a piggyback loan really is the best option for you.

Tags: Private Mortgage Insurance, personal finance, home loan, home mortgage,
PMI, piggyback loan, down payment