Yes, there is actually an appeal to choosing Private Mortgage Insurance over a combination loan, or “piggy back” loan. Private Mortgage Insurance, or PMI comes into play when buyers have less than 20% to put down on a home. Realistically speaking, that pretty much covers just about every first time homebuyer out there. With today’s rising housing costs, it’s almost impossible to save a traditional 20% down payment unless you are lucky enough to have been gifted from a relative.

 

PMI is how the lender protects the additional costs for insurance in the event you, as the buyer, should default on your loan. Keep in mind, homeowner’s insurance policies typically only cover up to 80% of the property’s value (which for this purpose represents the lender’s interest). So, in order to protect their investment, lenders are required to take out additional insurance in the amount that you, the buyer, lack. 

 

In the last couple of years, mortgage brokers have encouraged to their clients the option of a piggyback loan. This consists of the first primary loan of 80% of the property’s value, followed by a secondary loan for the difference, minus any applicable funding the buyer brings to the table. The secondary loan was of course at a higher interest rate and depending on the program, may be subject to rate hikes. The argument being that PMI, which is a calculated amount based on the purchase amount and buyer’s down payment, is a fee that is not deductible, unlike the interest paid on a secondary mortgage. However, with rising interest rates, buyers are now taking a longer look at the pros and cons between the two. 

 

I have always advised my clients to carefully weight the options carefully. What may seem like a no-brainer isn’t exactly the best choice. Combo loans are harder to qualify for. If you have less than perfect credit, it could very well not be the one for you. Payments with PMI may offer more attractive rates than double loans. If you happen to live in an area that is appreciating at a steady rate of 5% or more, well, PMI might be a better choice. Why? Well, say for example you have only 5% to put down, the difference between you and the 80% lenders will traditionally give is 15%. You could opt for a regular loan at 6.5% and pay for example, $150 a month in PMI, or have two loans, one a 6.5% and the second at 8%. With the first loan, in about 3.2 years you can cancel your PMI by the shear appreciation of your property. With the secondary choice, you would be required to refinance. Now granted, the average homeowner refinances within the first 3 years of ownership, it is not however, without cost.   Cost that translates into premiums, closing costs and simply higher interest rates. What homeowners might seriously overlook is the debt ratio. What you were able to qualify on initially has changed. You now have more debt with a mortgage payment. Not to mention, sadly enough, homeowners incur more debt with the lack of budgeting along with the responsibility of new home, i.e. new furniture, new curtains, etc. Never assume that refinancing is your default button. Whereas paying a regular payment along with the PMI premium, after your loan to value ratio is less than 79% (most lenders buffer an additional point or two than 80%), you can request a drop and reasonably see your payment go down!