Piggyback 2nd Mortgage VS Paying PMI on Your Home Loan (2024)

Compare Obtaining a Piggyback Home Equity Loan Versus the Cost of PMI

Is property mortgage insurance (PMI) too expensive? Some home owners obtain a low-rate second mortgage from another lender to bypass PMI payment requirements. Use this calculator to see if this option would save you money on your home loan.

For your convenience, current Redwood City first mortgage rates and current Redwood City second mortgage rates are published below the calculator.

Current Redwood City Home Equity Loan & HELOC Rates

Our rate table lists current home equity offers in your area, which you can use to find a local lender or compare against other loan options. From the [loan type] select box you can choose between HELOCs and home equity loans of a 5, 10, 15, 20 or 30 year duration.

Down Payments & Property Mortgage Insurance

Homebuyers in the United States typically put about 10% down on their homes. The benefit of coming up with the hefty 20 percent down payment is that you can qualify for lower interest rates and can get out of having to pay private mortgage insurance (PMI).

When you buy a home, putting down a 20 percent on the first mortgage can help you save a lot of money. However, few of us have that much cash on hand for just the down payment — which has to be paid on top of closing costs, moving costs and other expenses associated with moving into a new home, such as making renovations. U.S. Census Bureau data shows that the median cost of a home in the United States in 2019 was $321,500 while the average home cost $383,900. A 20 percent down payment for a median to average home would run from $64,300 and $76,780 respectively.

When you make a down payment below 20% on a conventional loan you have to pay PMI to protect the lender in case you default on your mortgage. PMI can cost hundreds of dollars each month, depending on how much your home cost. The charge for PMI depends on a variety of factors including the size of your down payment, but it can cost between 0.25% to 2% of the original loan principal per year. If your initial downpayment is below 20% you can request PMI be removed when the loan-to-value (LTV) gets to 80%. PMI on conventional mortgages is automatically canceled at 78% LTV.

Another way to get out of paying private mortgage insurance is to take out a second mortgage loan, also known as a piggy back loan. In this scenario, you take out a primary mortgage for 80 percent of the selling price, then take out a second mortgage loan for 20 percent of the selling price. Some second mortgage loans are only 10 percent of the selling price, requiring you to come up with the other 10 percent as a down payment. Sometimes, these loans are called 80-10-10 loans. With a second mortgage loan, you get to finance the home 100 percent, but neither lender is financing more than 80 percent, cutting the need for private mortgage insurance.

Making the Choice

There are many advantages to choosing a second mortgage loan rather than paying PMI, but the ultimate choice depends on your personal financial circ*mstances, including your credit score and the value of the home.

In 2018 the IRS stopped allowing homeowners to deduct interest paid on home equity loans from their income taxes unless the debt is considered to be origination debt. Origination debt is debt that is obtained when the home is initially purchased or debt obtained to build or substantially improve the homeowner's dwelling. Be sure to check with your accountant to see if the second mortgage is deductible as many second mortgage loans are issued as home equity loans or home equity lines of credit. With credit lines, once you pay off the loan, you still have a line of credit that you can draw from whenever you need to make updates to the house or wish to consolidate your other debts. Dual purpose loans may be partially deductible for the portion of the loan which was used to build or improve the home, though it is important to keep receipts for work done.

The drawback of a second mortgage loan is that it may be more difficult to qualify for the loan and the interest rate is likely to be higher than your primary mortgage. Most lenders require applicants to have a FICO score of at least 680 to qualify for a second mortgage, compared to 620 for a primary mortgage. Though the second mortgage may have a slightly higher interest rate, you may be able to qualify for a lower rate on the primary mortgage by coming up with the “down payment” and eliminating the PMI.

Ultimately, cold, hard figures will best help you make the decision. Our calculator can help you crunch the numbers to determine the right choice for you. We compare your annual PMI costs to the costs you would pay for an 80 percent loan and a second loan, based on how much you make for a down payment, the interest rates for each loan, the length of each loan, the loan points and the closing costs. You get a side-by-side comparison showing you what you can save each month and what you can save in the long run.

Additional Second Mortgage Uses

In addition to getting around PMI payments, some other common reasons people get a second mortgage include:

• consolidate other higher interest debts into a single lower interest payments
• creating a home equity line of credit (HELOC)
• fund home repairs & home improvement projects

Redwood City Home Buyers May Qualify For Low Downpayment Home Loan Options

Explore conventional mortgages, FHA loans, USDA loans, and VA loans to find out which option is right for you.

Find Out What Loan You Qualify For & Get Pre-Approved Today