Most of the financial advice out there is focused on how you can pay off the mortgage on your home as quickly as possible, from making lump sum payments to switching to bi-weekly payments rather than monthly.
Some home buyers in Washington State choose to put 20% down when buying a house, in order to avoid private mortgage insurance (PMI). But that’s not the only way to avoid PMI when buying a home. The 80/10/10 “piggyback” loan strategy is another way of avoiding mortgage insurance.
Objective: This article explains what PMI is, and how you might be able to avoid it by combining two mortgage loans to buy a home.
Private Mortgage Insurance in Washington State
In Washington State, private mortgage insurance is typically required in situations where a conventional home loan exceeds 80% of the property value. This is often the case when a borrower makes a down payment less than 20%.
PMI is a unique kind of insurance that is paid by the homeowner. The policy protects the mortgage lender from potential losses that may result from borrower default. In this context, “default” is when a homeowner is unable to continue making payments on the loan.
Washington State private mortgage insurance is usually required when a loan accounts for more than 80% of the home’s value.
But it’s not necessarily a bad thing. In fact, without the PMI industry, many people would be unable to buy a home due to a lack of funds. Private mortgage insurance offers a path to financing for people might not otherwise qualify for a home loan.
Of course, as a home buyer, you’d obviously like to avoid this extra cost if at all possible. And it is possible. There are several ways to avoid paying private mortgage insurance in Washington State. And one of them is by using what’s known as an 80/10/10 piggyback loan.
Avoiding PMI with a 80/10/10 Piggyback Mortgage
Washington State home buyers can avoid PMI by making a down payment of 20% or more, which in turn keeps the loan-to-value ratio below 80%. But not everyone can afford to put 20% down. Fortunately, there’s another option.
Borrowers in Washington State can also use an 80/10/10 piggyback loan to finance their purchase, as a way of avoiding private mortgage insurance. The “piggyback” descriptor comes from the fact that there are two loans associated with the home purchase.
In the 80/10/10 scenario, the home buyer makes a down payment of 10%. The remaining 90% of the purchase price is covered by two loans, one for 80% and the other for 10%. It all adds up to 100%.
Here’s how it adds up:
- 80: The first loan covers 80% of the purchase price.
- 10: A second mortgage loan is used to cover 10%.
- 10: The home buyer pays the remaining 10% as a down payment.
There are other variations of the piggyback loan strategy. The 80/10/10 version is one of the most common. This strategy allows home buyers to make a down payment less than 20%, while avoiding the extra cost associated with PMI.
Let’s Talk About Your Options
There are a lot of different loan options available to Washington State home buyers. That’s why it’s so important to consult with an experienced mortgage professional — someone who can help you choose the right financing option based on your unique situation.
Sammamish Mortgage has been helping borrowers in Washington State for more than 20 years. We offer highly competitive rates on a variety of mortgage products, some with flexible qualifying criteria. Please contact us today with your questions, or to receive a rate quote.