Most mortgage programs that allow borrowers to buy a house with little or no money down require private mortgage insurance, or PMI. This coverage protects the lender from the costs of foreclosing on a house when the borrower falls too far behind on the loan payments. Generally, mortgage insurance is required when the loan amount is for more than 80 percent of the home’s price. If you want to buy a house without a down payment yet avoid paying mortgage insurance, get a “piggyback loan.” Here, a second mortgage backs up the first mortgage.
The first mortgage is for 80 percent of the home’s price.
The piggyback loan is for 20 percent of the home’s price, minus the down payment, if any.
Thus, an “80-15-5” loan means that the borrower got a main mortgage of 80 percent of a home’s purchase price, a piggyback loan for 15 percent, and made a 5 percent down payment.
The interest rate on the piggyback loan typically is higher than the rate on the first mortgage. The combined payment, though, usually will be less than the payment on one large loan, plus PMI. The advantage is especially pronounced if the homeowner itemizes deductions on a federal income tax return because mortgage interest is deductible but mortgage insurance is not.
