A piggyback mortgage, or an 80/20 mortgage loan is exactly what it sounds like, a borrower takes out a second loan on top of or at the same time the first mortgage is started or refinanced. This specific loan was popular around 2007 before the mortgage crisis hit and when homebuyers didn’t have enough of an initial down payment, which is usually around 20 percent.
If you don’t have the required twenty percent down payment, lenders will require you to take out private mortgage insurance (PMI). This insurance will protect the lender in case a situation arises like the home going into foreclosure, compromising the value of the home and the sale won’t be able to cover the original mortgage.
Discover Home Loan, Quicken Loans and Close Your Own Loan offer private mortgage insurance with various rates. Refinancing a home or buying a home has become more attractive recently with mortgage rates for 30 years, falling 3.4 percent and 15-year rates falling to 2.61 percent according to a Freddie Mac weekly survey.
Benefits of a Piggybank Loan
Many homeowners have benefited from taking out a piggyback loan, especially during the housing slump and sluggish economy. One benefit is that the mortgage is often used to lower loan-to-value ratio of the initial mortgage to fewer than 80% so there is no need to purchase PMI. Even though this loan option is harder to come by these days, it can still be a viable option for some home buyers with good credit who have at least a 10% down payment. In some cases the interest earned on a piggyback loan can be deducted from the borrower’s taxes for additional savings which can save more through this loan than with a traditional loan with a PMI.
How do I qualify?
If you’re ready to take out a piggyback mortgage, make sure that you qualify for one. You must have a good credit history to get this type of loan, if not consider the traditional PMI loan. There will be a higher interest rate to pay on the second mortgage. Interest rates for these loans have nearly doubled since 2004.
The loan is much more expensive since you will be responsible for paying associated closing costs and fees on two mortgages instead of one. The piggyback mortgage doesn’t necessarily have to be fixed rate, it can also be an adjustable rate loan. A law was put into effect that allows the PMI payments to be tax deductible under certain circumstances halting another advantage of piggyback mortgages over mortgage insurance.
States with higher home prices such as California, Florida and Georgia have gained popularity in terms of purchasing mortgage insurance.
Even though this banking product is rare and people are unaware of what this type of loan is, they are making somewhat of a comeback. Keep in mind that there are some stern requirements when trying to apply for one.
They are great in that you can get a lower monthly payment by avoiding paying the PMI. If you plan to refinance in the hopes of taking cash out or if you’re planning to keep your house for less than five years, this second mortgage is a viable option. Always research and do your homework.