How to Use a Piggyback Loan to Avoid Private Mortgage Insurance

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Buying a home is a significant financial milestone, but many buyers face the challenge of affording a down payment while avoiding additional costs like Private Mortgage Insurance (PMI). One effective strategy is using a piggyback loan, which can help you bypass PMI and save money in the long run.

What Is a Piggyback Loan?

A piggyback loan involves taking out two separate loans simultaneously to finance a home purchase. Typically, the first loan covers most of the home’s price, while the second loan, often a home equity loan or line of credit, covers the remaining amount needed for a 20% down payment.

How a Piggyback Loan Helps You Avoid PMI

Private Mortgage Insurance is usually required when a borrower makes a down payment of less than 20%. PMI protects the lender if you default on your loan. By using a piggyback loan to reach a 20% down payment, you can avoid paying PMI altogether, saving you hundreds or thousands of dollars each year.

Example of a Piggyback Loan Structure

Suppose you want to buy a home costing $300,000. Instead of making a 10% down payment ($30,000) and paying PMI on the remaining mortgage, you could:

  • Take out a primary mortgage for 80% of the home’s price ($240,000).
  • Secure a second loan, such as a home equity loan or line of credit, for the remaining 10% ($30,000).

This approach brings your total down payment to 20%, eliminating the need for PMI.

Pros and Cons of Using a Piggyback Loan

Before opting for a piggyback loan, it’s important to weigh the advantages and disadvantages.

Advantages

  • Avoids paying PMI, saving money monthly and over the life of the loan.
  • Allows for a smaller down payment compared to saving for a full 20% upfront.
  • Can improve your chances of qualifying for a mortgage.

Disadvantages

  • Second loans often have higher interest rates.
  • Managing two separate loans can be more complex.
  • Increased debt load may affect your financial flexibility.

Is a Piggyback Loan Right for You?

Using a piggyback loan can be a smart way to avoid PMI and save money, but it’s not suitable for everyone. Consider your financial situation, credit score, and long-term goals. Consulting with a mortgage professional can help determine if this strategy aligns with your homeownership plans.