How to Avoid PMI on Your Wisconsin or Illinois Mortgage

Whether purchasing or refinancing your home, you can build your equity (i.e. pay down your mortgage) faster by NOT using a loan that requires private mortgage insurance in the structure of your financing. This is best accomplished with a "Piggy-Back" mortgage.

Private mortgage insurance (PMI) enables you to buy a home with less than a 20 percent down payment. Likewise, it allows refinance loans with less than 20 percent equity in your home. Though PMI allows many people to obtain financing, the added monthly cost can be significant. The portion of your monthly mortgage payment attributed to PMI is like paying rent because paying this money benefits someone other than you.

The Piggy-Back mortgage is simply an additional (2nd) mortgage that represents any amount financed ABOVE the 80% Loan-To-Value level. A first mortgage is written for 80% of the loan-to-value amount with the second mortgage written for the remaining loan amount requested. This prevents the need for PMI. An additional benefit is that ALL of your monthly payments go to the reduction of principle (on your 2 loans) and may be tax-favored. PMI doesn't give any tax advantages and the money paid for it simply vanishes every month.

How can you take advantage of this kind of financing structure? As an example: a borrower who needs 95% financing on a property purchase (or refinance) can have a first mortgage for 80% of the property's value, and a second mortgage for 15% of the property's value. By doing this, there is no need for PMI because the first mortgage loan does not exceed 80%. Mortgage payments on the two separate loans go to the mortgage holders (banks)…NOT to a company that derives profits from the PMI payments.

As an added benefit, this Piggy-Back loan can be structured as a Line of Credit that can be paid down and re-used. You can pay it off/down at a pace you choose, then you can access these funds again to make home improvements, fund education, buy an automobile, consolidate debts, etc. You'll have no need to apply for another loan for these needs. The caveat is that you must be disciplined enough to pay more than the interest-only payments required for the loan in order to create this "available" amount.

Alternatively, this second mortgage can be structured as a "closed-end" loan with a fixed payment. This is for a fixed period of years (15, 20 or 30) with equal payments being made over that period. This alternate is better for a borrower who lacks the discipline to make larger payments on the Line of Credit mentioned above.    

As an example, a purchase price of $400,000 with a 5% down payment has a PMI payment of $243 per month. By substituting this structure with a Piggy-Back loan, the overall amount of mortgage payments is reduced by $171 per month. The true benefit for this borrower is that by eliminating PMI, he will realize an equity gain of $13,501 in 5 years. This will grow to over $31,000 in 10 years. This is a sizeable gain. As property value increases, it will further enhance this borrower's net worth.

This much gain in equity would not be realized if PMI is included. The same equity increase can also be achieved when refinancing. Piggy-Back mortgages can work wonders when considered in your overall financial plans. Take a good look at how you can benefit from this strategy…the answers may present life-changing opportunities for you!

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