For home mortgage loans over $417,000, piggyback mortgages are making a huge comeback.
According to the 2013 Annual Real Estate Survey of the American Bankers Association:
Piggyback mortgages accounted for 3.8 percent of all loans originated by bankers surveyed in 2012, compared to 1.7 percent of the loans for 2010. To read more reports click here.
A Piggyback Mortgage loan means a home mortgage borrower is being underwritten for two mortgages simultaneously. The second mortgage can be structured as a home equity loan or a home equity line of credit.
Piggyback mortgages lost their popularity in the housing downturn, but now they are returning. They are used to avoid paying for mortgage insurance when a borrower does not have 20% down.
When the lender has more than an 80% loan to value on a property, they require mortgage insurance from the borrower. Getting around paying for this mortgage insurance is the purpose of the piggyback loan.
How to Avoid mortgage insurance with a Piggyback Mortgage
- Down payment: 10 percent of the purchase price or appraisal value, whichever is lower.
- 1st Mortgage: 80 percent of the purchase price or appraisal value, whichever is lower.
- 2nd Mortgage: 10 percent of the purchase price or appraisal value, whichever is lower.
But there is still another great reason to use a piggyback mortgage: to avoid going over the conforming loan limit. The conforming loan limit is $417,000, and when you borrower more than $417,000 the mortgage is called a jumbo loan, and they tend to have higher interest rates. Sometimes it can be advantageous to get a mortgage for the full amount, and sometimes it costs less to use a piggyback mortgage.
It is really a game of mortgage comparisons. To get a free mortgage options analysis for your particular situation, click here.
Disadvantages of a Piggyback Mortgage
- When it comes time to refinance, the mortgage company that holds the 2nd mortgage has to agree to remain in 2nd lien position on title. This is called a subordinate lien position, behind the primary mortgage company. The agreement we will need is called a re-subordination, and they are usually pretty simple to apply for.
- It is not easy to tap into the home equity, as 3rd mortgages are not usually allowed.
- The inconvenience of making two separate payments instead of one.
- Requires a good FICO score.
- Requires at least 10% down.
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