Piggyback mortgages

Dear Dr. Don,
I'm debating the merits of a piggyback 80-15-5 loan vs. a 15 percent down payment. Also, I am unsure whether to go 15 or 30 years. I will be 45 when I close on the home, and I don't want to be paying a mortgage when I'm 70+! But the higher payments will stretch my monthly budget (almost 50 percent) at least until my SUV is paid off. HELP!!!
Richard Restructure

Dear Richard,
For the uninitiated who are reading along with us, a 85-15-5 loan has a first mortgage equal to 80 percent of the home's value, a second mortgage equal to 15 percent of the home's value and a down payment of 5 percent.

The main advantage of this type of loan is that the mortgage lender doesn't require private mortgage insurance because the first mortgage has a loan-to-value ratio of 80 percent. So taking out a second mortgage concurrently with the first mortgage allows you to put down a smaller down payment without paying mortgage insurance. It can also reduce a first mortgage from a jumbo mortgage to the lower interest rate of a conforming loan.

Although the second mortgage will have a higher interest rate than the first mortgage and may have a shorter loan term, the argument for a piggyback mortgage is that the interest expense generates a potential tax deduction while the mortgage insurance payments do not.

Some lenders offer self-insured mortgages where private mortgage insurance isn't required, but the additional risk faced by the lender is priced into the interest rate on the loan. Once again, the additional interest expense may be tax deductible, but private mortgage insurance payments are not. Some self-insured mortgages have an automatic rate reduction once the loan reaches 80 percent of the home's original value.

What are you going to do with the 10 percent you have available for a down payment but won't be using with an 80-15-5 financing? If you're really worried about having your home paid off by retirement, you need to use this money for the down payment.

If your monthly budget won't carry a 15-year mortgage, then get a 30-year mortgage and make additional principal payments regularly. Use Bankrate's Mortgage Calculator to see how different strategies toward making additional principal payments change the payoff date on your loan.

Staying current on your payments is important to maintaining your credit rating that you should err on the side of caution when deciding whether to use a shorter-term loan. Missing contractual payments is a big deal. Skipping an additional principal payment puts you behind in meeting your financial goals but won't hurt your credit.

Alternately, you could get a 20-year loan. Lenders offer them, even if they aren't as common as the 15- and 30-year mortgages. If there's not much of a difference in the interest rate between the 20-year and the 30-year, then stick with the 30-year and make the extra payments.