If you need cash and have some equity in your home, you might consider applying for a home equity loan. Home equity loans are great options when cash is needed; however, there is a chance you might end up having to pay private mortgage insurance (PMI) if you take out the cash you need. To avoid this, you might be able to use a piggyback equity loan to get the cash you need without paying PMI.
What Is PMI?
PMI is a type of insurance lenders often require when people borrow more than 80% of the value of their home. This insurance offers protection to the lender if a borrower defaults, but it does not offer anything to you. The amount you will pay for this is 0.5% to 1% of the total amount of the loan, and the lender will determine if you must pay this by calculating the loan-to-value (LTV) ratio on your home. This ratio compares the amount you owe to the current value of the house. If the amount is over 80%, you will pay PMI.
Paying PMI is not considered a good thing; however, it does allow a way for people to borrow over 80% of the value of their home.
What Is A Piggyback Loan?
Some lenders will help borrowers avoid paying PMI by offering loans known as piggybacks. A piggyback loan is considered an equity loan, but it will not result in having to pay PMI. This could help you if the cash you want to take out of your home equity will push you over the 80% limit.
If you choose this option, the lender will issue you a piggyback loan and this loan will not affect your LTV. There will be no PMI to pay, but there may be additional fees. You might have to pay an origination fee for the loan and the interest rate might be higher than the rate you would get on a regular equity loan. In addition, these loans typically require paying interest only for the duration. They then require a balloon payment at the end.
Before you choose a piggyback loan or a regular equity loan, you should compare the costs for each one, including the amount of money you would pay for PMI. After doing this, you will be able to see which option is the cheapest. To learn more about home equity loan options, contact a mortgage lender today.
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