Until recently the choice between PMI, private mortgage insurance, or a second mortgage to assist you in getting a loan if you did not have a 20% down payment was easy.
The historic low interest rates and healthy tax benefits from of piggyback loans (a second mortgage to finance a down payment) usually made them a cheaper alternative to PMI. Times have changed. Keith Gumbinger, , vicepresident of HSH Associates, a mortgage information publisher, says " The playing field between the piggback loan and morgage insurance has leveled considerably because interest rates on second loans have been rising, pushing the typical rate on a second loan above 8%." In addition, mortgage defaults have increased and lenders are less willing to write such exotic loans for owners who don't have much of their own money at stake.
To figure out which option is best for you, visit mtgprofessor.com and use the calculator 14b. A quick and dirty formula: If home prices are rising PMI is often the better option. After a few years, you can usually cancel when you have 25% equity in the property. If prices are flat, the tax breaks from a piggyback loan make it the best deal.
