Is a Piggyback Loan the Solution for You?
In recent days, it feels like every penny counts. And if you’re in the market for home, it can be a little bit tense. But keep in mind that challenging markets and periods of fluctuating rates are nothing new. Despite less than favorable markets, people have found ways to continue taking successful steps in their homeownership journey. How? With the help of the right mortgage solutions.
In this article, we’re highlighting a program that helps you get the home you want while keeping more money in the bank. Let’s talk about Second Mortgages, otherwise known as Piggyback Loans.
What is a Piggyback Loan?
A Piggyback Loan is a type of loan that is taken out simultaneously with your first mortgage. There are two common types of Piggyback Loans: Closed-End Second Mortgages and Home Equity Lines of Credit (HELOC). These loans are commonly called 80/10/10 loans because of the way they are broken down financially. The 80 is derived from the first mortgage, which covers 80% of the purchase price of, typically, a 30-year fixed mortgage. The piggyback loan or second mortgage covers an additional 10% of the home price. The final 10% is the down payment you pay out-of-pocket.
The bottom line is that a piggyback loan allows you to effectively put 20% down on your home while only paying 10% out-of-pocket. How’s that for saving some pennies?
Benefits of a Piggyback Loan
Does the concept of a Second Mortgage sounding a little intimidating? Let’s clear the air by clarifying how Piggyback Loans can help.
Ways to Save
First and foremost, a piggyback loan lowers your down payment so you can keep more cash in the bank. You’re only putting 10% down out-of-pocket. Meanwhile, the second mortgage helps bring your total down payment to 20%, meaning you do not have to pay private mortgage insurance (PMI) premiums.
Additionally, since you are putting more down on your home than you would have with only a 10% down payment, you will also lower your interest rate. This lower interest rate can potentially save you thousands of dollars over the life of your loan.
Finally, the smaller loan amount on your primary mortgage may help you stay within the conforming loan limit and avoid Jumbo Loan requirements.
No PMI + lower interest rates + conventional loan qualifications = a whole lot of savings.
A Convenient Option
Despite having two mortgages, a piggyback loan really is like a two-for-one special. Both mortgages close at the same time, so you only have one closing date, one set of paperwork, and one closing cost for two mortgages. You also can pay off your second mortgage at any time that is convenient for you. If you receive an annual bonus or make a sale on a current home, you can use those extra funds to pay off the second mortgage.
Additional Details to Consider
While Second Mortgages can help you save, it is also important to consider the additional costs you acquire by piggybacking.
Second Mortgages Rates
Typically, your second mortgage’s interest rate will be higher than your first one. Second Mortgages have heightened short-term interest rates. Therefore, you should think about your anticipated timeline for paying off your second mortgage and then consider the interest and PMI expenses you will acquire over that time.
It is also important to realize that refinancing with a Second Mortgage can be more complicated than a refinance with just one mortgage. Ideally, it would be best to pay off your second mortgage before taking additional steps in your homeownership journey. However, if you do refinance with a second mortgage, it is by no means impossible. You may just face some additional steps.
If you want to pay off the second mortgage in your refinance and combine the two mortgages into one, you need to have enough equity to pay any outstanding balance on the second mortgage. You also can look into a “subordination agreement” which is when you only refinance your primary mortgage but agree that your second mortgage does not take priority over your new, refinanced mortgage.
Qualifying for a PiggyBack Loan
As you may imagine, to qualify for two loans simultaneously, you have to be, well… well-qualified. You likely will need a credit score of 680 or more, with a greater chance of success if your credit score is 740 or more. In addition, your DTI should be no more than 43% after paying both the primary and secondary loans. You will also have to provide tax documentation to prove stable income and employment. These stricter requirements help ensure that a piggyback loan is a reliable investment for both you and the investor.
Is Two Better than One?
If you want to talk about more ways that two mortgages can be better than one for you and your homeownership journey, talk to one of our expert mortgage bankers. They can help you decide if piggybacking is the best way to keep your pennies in your piggy bank. Contact us to get started.