Home buyers are often surprised to discover that they have a lot of
different options for getting the financing which they require. One of
the options which are currently regaining their past popularity is the
piggyback mortgage. Find out what it is and consider its pros and cons
to decide whether it will be the right choice for you.
How It Works
The
piggyback mortgage is a home equity loan which is taken out at the same
time as the main home loan. Basically, the loan amount which the
borrower requires for financing the purchase of the property is split in
two. The most popular type of piggyback loan is the 80/10/10 program.
You take out 80% of the property value as part of the primary home loan
and another 10% with the home equity loan. You pay the remaining 10% of
the property value out of your pocket in the form of a down payment.
Requirements
Since
the piggyback mortgage is a second home loan, it is riskier for the
lender. This is because if you default and your property is foreclosed,
the primary lender will get the required proceedings first. The
secondary lender will get only the remainder no matter whether it is
sufficient to cover their cost.
For this reason, the initial home
equity loan usually comes with a slightly higher interest rate. This is
also the reason why lenders set stricter requirements for borrowers. In
order to take out such a loan at present, you will need a credit score
of at least 700 and a debt-to-income ration lower than 43% and
preferably close to 36%.
Benefits
There are two main ways in
which a piggyback mortgage can be used for bringing financial benefits.
Most of the home buyers who decide to use it take it out in order to
avoid paying lender's insurance. This can make great financial sense
since the monthly premium on such a cover is around $200 on average
while the policy typically stays in place for around 10 years. If you
consider whether to use this unique type of home equity loan for the
purpose of saving on lender's insurance, you have to calculate the
savings which you will get to make sure that it is worth it.
The
buyers of expensive properties can also take advantage of this type of
home equity loan in order to save. This is a highly beneficial option
especially if you cannot get approved for the whole amount of financing
which you require. Just keep in mind that at present the interest rates
on the jumbo loans for financing expensive properties are quite low. In
this case, it may be more cost-efficient to go for this option.
Drawbacks
There
are two major drawbacks to piggyback mortgage loans. Firstly, when you
want to refinance you need to get the approval of the secondary lender
and there is no guarantee that they will agree. This may put you in a
very disadvantageous position and cost you a lot of money.
The
other drawback is that since you already have a home equity loan, you
will not be able to take out another one. This means that you will be
unable to tap on the equity that you built in the property.
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