If you’re buying a home and don’t make a down payment of at least 20%, you’ll likely be required to pay a Private Mortgage Insurance (PMI) fee. The lender wants to protect itself from the default of the borrower on the loan. But the cost of that collateral, PMI, is paid monthly by the borrower, not by the lender.
Since the human brain is genetically linked to “getting everything for nothing”, a solution had to be found to get around the annoying PMI.
One solution starts automatically. By law, if you close your loan on or after July 29, 1999, and if the amount you still owe on your loan is less than 78% of the purchase price, a PMI is no longer required.
The second solution is Lender Paid Mortgage Insurance (LPMI) where the lender, not the borrower, “prepays the cost of the insurance” but the lump sum is transferred to the mortgage and amortized over the entire life of the loan. So their final cost is much more to the consumer. Not recommended.
Another solution to avoid PMI is to get a piggyback mortgage.
A piggyback mortgage is actually a second mortgage that closes with the first mortgage so that the percentage of the first mortgage within the total loan drops to 80%, so the need for PMI can be legally circumvented.
There are two different versions on the back. Most common are “80-10-10” mortgages where the first mortgage makes up 80% of the total mortgage, the second “on the back” loan makes 10%, and the customer offers the remaining 10% as a down payment.
There are 80-15-5 and even 80-20 versions that do not require a down payment.
When you pay a PMI, you can’t deduct it from your taxes like the interest paid on your first mortgage. But the interest you pay on your (second) mortgage is also tax deductible.
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