Piggyback mortgages were quite popular before the year of 2007 as a tax deductible alternative for conventional PMI premiums. 2007 broke this subtle balance as Congress made PMI premiums tax deductible, too, but for that one year only. Being limited to certain restrictions and so far unpredictable future, PMI still leaves some room for the piggyback to kick and prove its worth.

First, let me explain how the Piggyback Mortgage option works. If a homebuyer needs to borrow more then 80% of the property’s purchase price, he either goes for one conventional mortgage and pays Private Mortgage Insurance (PMI) premiums, or tries to avoid it by opting for either Lender-Paid Mortgage Insurance (LPMI) or a Piggyback Mortgage, also known as 80/20. Actually, “80/20″ explains a lot by itself: the mortgage is, in fact, a combination of a primary mortgage for 80% of the purchase price and a secondary mortgage for an amount required to fill up after the down payment. The more comprehensive names for this mortgage sometimes are 80/10/10, or 80/15/5, or 80/5/15, indicating the details of the secondary mortgage – 10% borrowed/10% own down payment, 15% borrowed/5% own down payment, 5% borrowed/15% own down payment, respectively.

If both the primary and the secondary mortgages are provided by the same lender, the 80/20 is usually treated as one combined mortgage, which means closing costs for one. If the primary and the secondary mortgages come from different lenders, closing costs are to be paid to each of them, which shrinks the prospect saving a lot.

The 80% primary loan requires no insurance and can be a fixed rate or an adjustable rate mortgage with any options you will find appropriate. The secondary mortgage is also pretty much a free choice, but you have to be prepared that the interest rate on this one will be considerably higher. This mortgage comes second in the refund queue in case the borrower defaults, i.e. is considered to be riskier for the lender, and lenders are usually not shy to charge for whatever risk they claim they may be running.

Depending on the amount of the secondary loan and your financial potential, you may want to have the term of the secondary loan shorter than that of the primary loan. The shorter the term – the higher the monthly payments – the sooner the mortgage amortizes – the smaller the overall amount paid as interest on the loan. Or at least some occasional extra payments can help you get it off your back sooner.

Another way to free yourself from this combined mortgage when the time comes is refinancing when the total balance of the 80/20 combination hits the 80% mark. Refinancing, however, always involves new closing costs and other payments that may turn the whole idea into a bad choice. Not inevitably, though. Every case and situation is unique; the calculations and comparisons should be built on honest and true information about the property, your income and the mortgage details.

It is also true, that Piggyback is not always the best choice against PMI. The two most influential, in my opinion, factors are: the pace of the property appreciation (or depreciation), and the period you are going to actually own the property. If your property appreciates at a considerable pace, it may allow you to get rid of PMI sooner, even though the procedure is not cheap or easy. The property appreciation, however, has no effect on a piggyback mortgage – it has to be paid off according to the conditions agreed upon at closing. Nevertheless, even in this case you may still be better off with a piggyback loan, so always pre-calculate and estimate and compare before making your choice. There are special sites that provide information on current property values in different regions. Check on the area you find attractive, preferably do it periodically during a considerable period of time, to build an idea of the dynamics of real estate prices there.

Piggyback mortgage monthly payments are usually lower compared to a conventional mortgage with PMI. If you are not going to live in the property for a long time, piggyback may be a more sensible option for you, as the monthly payments will not be too heavy on your budget; but a long term ownership will mean that you will have to pay actually two mortgages for a very long period of time. But for the financial inconvenience, it makes it almost impossible for you to qualify for another loan, should you happen to need one. PMI, on the other hand, gets to be cancelled at a certain point, and it always is just one loan anyway.

Now, the last, but not least. Piggyback mortgages, as well as Lender-Paid Mortgage Insurance Loans, require a good credit score to qualify.

A mortgage will become your biggest debt in years! For most people it is true, but it not as scary as it may sound. When you have the knowledge, when you understand what exactly is going on, when you are in full control of the situation – trust me, it is not scary!

I am here to share all the knowledge of the matter I have, with you.

We’ll start with the general idea of the most frequently used mortgage programs.

The two fundamental types of mortgages are the Fixed Rate Mortgage and the Adjustable Rate Mortgage. They both are amortized mortgages, which means that you have to repay the money you borrow (the principal) plus the interest on this money. As the name suggests, the Fixed Rate Mortgage provides the comfortable stability of a fixed interest rate – no matter what, you always know that you will not wake up one day to find out that your debt has unexpectedly doubled. If you have a stable job and your income flow is smooth and steady – this kind of mortgage can be for you. The only problem is that its Interest Rate may be higher than the Interest Rate of an Adjustable Rate Mortgage. You have to pay for the comfort, but it may be well worth it, if you don’t feel very adventurous about your finance.

An Adjustable Rate Mortgage usually looks very appealing in the beginning – the lenders use this trick to attract more customers, but later on the Rate can be changed and, as you understand, there are extremely few, if any, lenders ready to make the rate lower, so it will go up. However, the probability of you waking up to a doubled debt even with this type of mortgage is next to impossible either. There are laws and regulations about adjustable mortgage rates, protecting both the borrower and the lender. First of all, in the very beginning you can have the Rate fixed for as long as several years (the longer this period – the higher the Rate). Next is the Interest Rate Cap – the limit of the Rate increase. Moreover, the increase of the rate is not the personal whim of the lender. The rates are determined by several macro-economical indexes, which, in fact, are not controlled by the lender in any way, or by anyone at all, except for His Majesty Market.

All other types of mortgages are basically variations and derivatives of these two. The number of the variants is practically unlimited, which is good, because you will always be able to find a program to satisfy your needs and budget.

For example, an Option Adjustable Rate Mortgage adds a lot of flexibility (and complexity) to a conventional Adjustable Rate Mortgage. Every month you are given a choice of payment options: you can pay an amount equal to a period payment of, say, an interest-only mortgage with your actual interest rate, or as if your Interest Rate were 1%, or some other combination. The Interest Rate can be adjusted any month, too. This mortgage plan can be perfect for people whose income is not even all the year around. The only thing that is fixed in this mortgage plan is the minimum amount of a period payment, which, as usual, is very attractive in the beginning, but beware – it tends to increase with time and may actually result in an amount virtually impossible for you to pay.

Fixed Rate Mortgages may have an easier mechanism, but it does not mean they lack options. The most common of them is the so-called Balloon Mortgage. It’s a sort of a cross-breed of a fixed rate and an adjustable rate mortgage. On the one hand, the Period Payments are calculated on the same basis as, say, with a 30-year Fixed Rate Mortgage, but the actual “balloon” term is considerably shorter. Usually, after 5 or 7 years the Balloon Mortgage has to be completely repaid, which forces the borrower to either pay off the remainder of the balance himself at the end of this period of time or refinance at a new interest rate. The new rate, however, is not limited the way it is with an Adjustable Rate Mortgage, so you can expect literally anything. Most lenders do have common sense, though. This type of mortgage has proved to be useful to people who intend to move out of the property as the balloon period expires.

An Interest-Only Mortgage can be very helpful if you feel that actual repaying of both the amount you’ve borrowed (the principal) and the interest on it may become an unbearable burden to your budget. You may consider paying only the interest, but beware – after the 30 years of accurate repayments, the mortgaged property will not be yours! The full amount of the principal (unless you make some occasional extra payments) will still be your debt, and you’ll have to either sell your property and repay the debt or re-mortgage the property on the terms that will exist 30 years ahead from now. Most lenders, however, prefer mortgages that do get repaid, so you may find it quite tricky finding a lender ready for a complete 30-year Interest-Only Mortgage. Usually a starting period of 5 Interest-Only years is offered, but after that you will have only 25 years left to repay the Principal – the period payments will be even higher!

Quite an interesting option is the so-called Piggyback Mortgage. When buying a home, the buyer is usually required to put at least 20% of the purchase price down. Unfortunately, not every buyer is capable of doing that easily. That’s where one can count on some crucial support from a Piggyback. You mortgage 80% of your new home on the terms of your selected mortgage, and then the remainder of 20% too, as a fine addition to the major mortgage, but on different terms. You end up with actually a combination of two mortgages on the same property, with an advantage that you don’t have to put down any money of your own. This combination would make an 80/20/0 Piggyback Mortgage, i.e. 80% – your first mortgage, 20% – the secondary mortgage, 0% – your own money. Other frequently used options are 80/15/5, 80/10/10 and 80/5/15.