Borrowers have to be careful the don’t bite off more than they can chew. Many banks will lend people money when they shouldn’t. It’s rarely a pretty sight in the end, when someone borrows way over their head.

Question:
We are in the process of buying our first home and although we have excellent credit, one of our problems is the down payment, which will result in a PMI. Do you recommend doing a 100 percent financing divided into two loans (80/20)?  
 
Answer:
I think a no-equity 80/20 piggyback loan should be avoided if at all possible. Being able to make even a small down payment of 5 percent in an 80/15/5 structure gives the lender of the second mortgage a bit of a cushion, allowing you a slightly lower interest rate.

Being upside down in a car loan is one thing; being upside down in a home is quite another. When you don’t put any money down, you’re counting on rising home prices to build your equity position in the home, at least in the early years of the mortgages. If you’re forced to sell, you may not get enough at closing to pay your Realtor and your mortgages.

Homeowners don’t like paying private mortgage insurance, or PMI, because they’re paying an insurance premium to protect the lender. But those premium payments don’t last forever, and PMI allows buyers with less than a 20 percent down payment the ability to buy a home with one 30-year, fixed rate mortgage loan.

The Bankrate feature”PMI industry fights back against piggyback loans” explains how to decide between a piggyback loan structure and a first mortgage with PMI.

[Source Bankrate.com]

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