U.S. house prices have jumped by leaps and bounds over the past few years. While that is great news for homeowners who are racking up tons of equity, it makes it much harder for potential buyers to save up enough to break into the market. If you find yourself in the latter category, there may be a mortgage option that could help you buy a home sooner than you think and avoid paying private mortgage insurance. It’s called a piggyback loan.
What is a Piggyback Loan?
A piggyback loan is also known as an 80/10/10 loan and it is technically a second mortgage. Here’s how it works: at the time you buy a house, you put down a 10% down payment, take out a primary mortgage for 80% of the loan value, and then take out a second mortgage to cover the last 10% of the loan total. In other words, the second mortgage is “piggybacking” on the first mortgage to cover the entire cost.
You may be wondering why someone would choose this more complicated loan route if they already have a 10% down payment. Why not just take out an FHA loan that only requires a 3% down payment and save the rest of the cash for home maintenance costs?
Without a full 20% down payment, you will be required to pay private mortgage insurance, or PMI. This is insurance that actually protects the lender, not you. It guarantees the lender will get at least 20% of the loan total back in case you ever default. Once your equity reaches 20%, PMI can be canceled, but until then it can cost you between 0.5% and 1% of your loan amount each year. If your mortgage was for $350,000, you could pay up to $3,500 in annual PMI. A piggyback loan, however, makes up the difference of that traditional 20% down payment, exempting you from having to pay PMI.
In addition to saving you thousands of dollars a year, if you are a fiscally-wise homeowner, you can knock out the piggyback mortgage quickly and then have lower mortgage payments for the rest of the loan. For example, a piggyback loan on a $350,000 property would be $35,000. If you know you’ll be getting a monetary windfall soon, i.e., tax refund, employee bonus, etc. or if you can be really disciplined at saving extra money, you could put that money towards your piggyback loan until it is paid off, cutting your monthly mortgage payment by several hundred dollars.
Piggyback loans can also help score you better interest rates, by providing the full down payment on the first mortgage. Or if your loan size is large enough to warrant a jumbo loan, your piggyback mortgage might bring the first loan back down into conventional territory with slightly lower rates.
There are a few things to consider about piggyback loans. The second mortgage usually gets a higher interest rate than the first. If you do not plan to pay off the piggyback loan quickly, the added interest could cost you more over time than paying PMI.
Piggyback loans can be helpful for financially disciplined home buyers who are looking for ways to make home ownership more affordable. Give us a call today to us to see if a Piggyback Mortgage loan makes sense for you.