Home Mortgage of North Carolina, Inc.: Alternatives to PMI

Alternatives to PMI

Conventional loans with equity or a down payment of less than 20% will normally require private mortgage insurance (PMI). However, in many circumstances there are advantageous alternatives to traditional PMI.

The factors you will need to carefully consider are your estimates of:

length of time you will probably live in the home

interest rate of your loan

appreciation rate of homes in your area

‘Piggyback’ Home Loans
Home Mortgage’s conventional ‘Piggyback’ series features the ability to avoid private mortgage insurance (PMI) when the down payment or equity in your home is less than 20% of the value. By combining a first mortgage and a ‘piggyback’ second mortgage, you may reduce your monthly payments below a traditional mortgage loan with PMI.

The ‘piggyback’ loan series is available with a down payment of as little as 5 to 10% and may be used with many of our fixed rate and adjustable rate loans.

Advantages:

lower mortgage payment

possible tax deductibility of the interest versus the nondeductible PMI payments (consult an accountant regarding your individual circumstances)

lower interest rate (by using a piggyback loan you may be able to keep the first mortgage amount below $417,000 and take advantage of lower conforming rates versus jumbo rates)

Disadvantages:
There are two key factors to consider with piggyback loans:

The length of time that the loan will be outstanding and

The home’s appreciation rate.

The total payment of the first mortgage and the piggyback loan may be lower than a single loan with PMI. However, you can have PMI eliminated on a loan by either:

paying the loan down so that there is 20% equity or

obtaining a new appraisal to demonstrate that you have at least 20% equity. (Please confirm all the requirements with your current loan servicer.)

Of course, if the home has appreciated enough for you to have 20% equity, you could refinance the first and second loan and be left with one new loan without PMI.

Another Option

Self-insured mortgages
Another alternative to a traditional PMI loan is to build the lender’s additional risk into the loan itself. The loan will have a higher interest rate but will not require traditional PMI. The lender for the loan covers the risk internally.

Advantages

While the interest rate on the loan will be higher than the same loan with PMI, the payment will usually be slightly lower.

Since home interest expense is deductible, the after tax cost of the self-insured loan is lower. (Certain self-insured products allow for a reduction in the interest rate when the loan has paid down to 80% of the original value.)

Disadvantages
If you live in the home long enough and/or the appreciation rate is high, you may be able to have PMI removed from the loan early. By eliminating PMI you will have a lower payment than a self-insured mortgage. Of course, if the home has appreciated enough for you to have 20% equity, you could refinance to a loan without PMI.