Quick overview

PMI alternatives replace monthly private mortgage insurance with other financing choices so a borrower can avoid that recurring cost. Common paths include a piggyback (second) loan—often in an 80‑10‑10 structure—or accepting lender credits in exchange for a higher interest rate or lender‑paid mortgage insurance (LPMI). In my practice I’ve seen each strategy save money for the right borrower, but the best choice depends on rates, loan terms, and how long you plan to keep the mortgage.

How piggyback loans work

  • Typical structure: 80/10/10 (first mortgage 80%, second mortgage 10%, down payment 10%) or 80/15/5. Keeping the first mortgage at 80% LTV avoids PMI because lenders view the primary lien as conforming to an under‑80% LTV threshold.
  • Second loans: the second lien can be a fixed‑rate second mortgage or a HELOC. Second loans typically carry higher interest and may have different amortization and prepayment rules.
  • Tradeoffs: you avoid PMI but pay interest on the second loan. If the second loan is variable (HELOC), payment risk increases. Closing costs and combined APR matter more than the presence/absence of PMI alone.

How lender credits and lender‑paid options work

  • Lender credits: the lender reduces your out‑of‑pocket closing costs by offering a credit in exchange for a higher mortgage interest rate. That raises your monthly payment over the life of the loan.
  • Lender‑paid mortgage insurance (LPMI): the lender pays the mortgage insurance premium and recovers the cost by charging a higher interest rate. LPMI cannot be canceled in the same way borrower‑paid PMI can; to remove the added cost you’d usually need to refinance.
  • Tradeoffs: lender credits and LPMI lower upfront costs but often increase total interest paid. Compare the APR and run a break‑even analysis based on how long you expect to hold the loan.

Pros and cons (summary)

  • Piggyback loan

  • Pros: Immediate avoidance of PMI; first mortgage stays at ≤80% LTV which can help qualifying terms. Useful if you want a fixed interest rate on the bulk of your debt.

  • Cons: Second loan interest (often higher); possible extra closing costs and complexity; second lien increases overall leverage.

  • Lender credits / LPMI

  • Pros: Lower out‑of‑pocket at closing; simpler single‑loan structure if LPMI, fewer documents than two loans.

  • Cons: Higher ongoing rate or permanent higher cost (LPMI may not be removable without refinancing). Can be more expensive if you keep the loan long term.

Who should consider each option

  • Consider a piggyback loan if: you can manage two loan payments, expect to pay off principal or refinance before the second ballooned costs outweigh PMI savings, or want a fixed rate on the majority of your debt.
  • Consider lender credits/LPMI if: you need to preserve cash now, expect to sell or refinance in a short time frame, or prefer the simplicity of a single loan despite a slightly higher rate.

How to evaluate alternatives (practical steps)

  1. Request written loan estimates for both scenarios: a single loan with PMI, a piggyback (first + second), and a loan with lender credits/LPMI. Compare APR and total costs over 3, 5, and 30 years.
  2. Calculate break‑even: how many months until higher monthly payments from a higher rate exceed the cost saved by avoiding PMI?
  3. Compare second‑loan options: fixed second vs HELOC—look at initial rate, adjustment terms, and prepayment features.
  4. Verify product rules: FHA loans require mortgage insurance (MIP) regardless of down payment size—piggyback strategies often apply to conventional loans, not FHA. See HUD guidance for program‑specific rules.
  5. Ask for an amortization schedule and run scenarios or ask your mortgage planner to run net present value (NPV) comparisons.

Common mistakes to avoid

  • Focusing only on monthly payment instead of total cost (APR and interest over your expected holding period matter).
  • Assuming lender credits are always cheaper—higher rates compound over decades.
  • Using a HELOC as a second loan without planning for rate resets and payment shocks.
  • Failing to check whether the loan program accepts piggyback structures (some lenders and loan programs limit or prohibit them).

Short FAQs

  • Can you remove lender‑paid mortgage insurance later? Usually only by refinancing; LPMI is priced into the rate and not canceled like borrower‑paid PMI.
  • Is piggyback the same as a second mortgage? Yes—piggyback is simply taking a second mortgage concurrently to lower the first‑lien LTV.
  • Does FHA allow piggyback loans? FHA requires MIP on its loans; piggyback strategies are typically used with conventional financing, not FHA. For FHA program details see HUD.

Professional takeaway

In practice, I evaluate the borrower’s timeline, cash position, and risk tolerance. For short holding periods, lender credits or LPMI can make sense. For borrowers who plan to stay long term and can tolerate two liens, a fixed‑rate piggyback second can be more cost‑effective. Always compare loan estimates and run a break‑even/NVP analysis before choosing.

Internal resources

Authoritative sources

  • Consumer Financial Protection Bureau — private mortgage insurance basics: https://www.consumerfinance.gov/ (search “private mortgage insurance PMI”).
  • U.S. Department of Housing and Urban Development — mortgage insurance rules and FHA guidance: https://www.hud.gov/.

Disclaimer

This article is educational and does not constitute individualized financial, tax, or legal advice. For recommendations tailored to your situation, consult a qualified mortgage planner, tax professional, or attorney.