Buying a home is expensive and sometimes one mortgage loan just isn’t enough, that’s where piggyback mortgage loans come in. A piggyback loan is a home financing option where a property is obtained using more than one mortgage from two or more lenders. Although two mortgages seems daunting, it offers a solution that gets you into your dream home as soon as possible.
The mechanics of piggyback mortgage financing are quite simple. Lenders structure loans in a unique way for a piggyback mortgage. One loan is 80 percent of the home’s value like any mortgage, the remaining 20 percent rounds up the rest of the down payment. Ultimately, piggyback mortgage is meant to be an alternative to private mortgage insurance and actually saves you money in the long run. Usually the remaining 20 percent is a form of home equity loan or line of credit. However, many are still unsure of its benefits, that’s why North Creek Financial is here to explain the process:
How do I benefit?
Piggyback mortgage loans enable borrowers to qualify for another mortgage without paying for private mortgage insurance.
Borrowers who take out loans and are unable to provide a 20-percent down payment must pay private mortgage insurance to qualify for a mortgage. Private mortgage insurance also protects lenders from default.
Piggyback mortgages are secondary loans taken out simultaneously with an initial mortgage in order to lower the loan-to-value ratio. Loan-to-value ratio is used by lenders to examine an application before a mortgage is approved. Having a lower loan-to-value ratio can put a borrower below the requirements for a private mortgage.
Homeowners can potentially save hundreds of dollars a month through piggyback loans depending on the borrower’s loan agreement. Private mortgage insurance can add a significant premium to the monthly mortgage payments. To cover the costs of private mortgage insurance, borrowers either pay lump sums each year or the cost is added to monthly mortgage payments. Through piggyback loans, the need for private mortgage insurance is eliminated which can significantly lower the interest rate of your mortgage.
The risk of the entire loan is spread amongst the lenders when more than one lender is involved in a loan transaction. Through a piggyback loan, a homebuyer with little or no down payment would have more luck with the approval process than if they were to use a single conventional loan.
Piggybacking loans are becoming increasingly popular and can be offered at competitive rates that are less expensive than other options. With a piggyback loan, the costs of second mortgage is usually less than the cost of monthly payments for private mortgage insurance.
A piggyback loan tends to level the playing field by making homeownership a possibility for more buyers, especially those who have limited equity to use as an initial down payment.