Piggyback Mortgage Loans: What You Need To Know

By Mark Di Vincenzo. May 7th 2016

Piggyback mortgages have helped a lot of homeowners, especially during the nation’s housing slump, but they aren’t terribly well known – at least not to the masses.

In order to educate the masses, we will ask and answer a number of questions about piggyback mortgages, starting with the most obvious one.

What Is A Piggyback Mortgage?

It is a package of two loans with one loan added on top of the other. The second mortgage is taken out by a borrower at the same time the first mortgage is started or refinanced.

So The Second Mortgage Is Piggybacked On Top Of The First Loan, Right?

Exactly.

Why Would Anyone Want A Piggyback Mortgage?

Piggyback mortgages are often used to lower the loan-to-value ratio of the first mortgage to under 80 percent in order to eliminate the need for private mortgage insurance. Private mortgage insurance is usually required if a homeowner does not make at least a 20-percent down payment. (To learn more about private mortgage insurance, see Understanding The Cost Of Private Mortgage Insurance.)

What’s The Downside To Piggyback Mortgages?

They almost always come with a higher interest rate than a stand-alone, first mortgage.

Are There Any Other Reasons Why I Wouldn’t Want A Piggyback Mortgage?

If you think your house will appreciate in value quickly -- so that the loan-to-value ratio will not be higher than 80 percent for long – it might make more sense to pay for private mortgage insurance rather than using a piggyback mortgage.

What Is The Most Common Form Of Piggyback Mortgage?

80-10-10.

Huh?

The 80 is the percentage of the property covered by the first mortgage. The first 10 is the percentage of the property's value derived from the second loan. And the final 10 percent comes from the borrower's down payment.

What Are The Other Types Of Piggyback Mortgages?

The 80-5-15 -- a first mortgage of 80 percent a second mortgage of 5 percent and a down payment of 15 percent – is another common piggyback mortgage. The 80-15-5 -- a first mortgage of 80 percent, a second mortgage of 15 percent and a down payment of 5 percent – and the 80-20 -- a first mortgage of 80 percent, a second mortgage of 20 percent and no down payment – are much less common.

Do The Down Payments Have To Be Exactly 5 Percent, 10 percent Or 15 percent?

No. It is more accurate to say they can be between 0 percent and 5 percent, 5 percent and 10 percent, 10 percent and 15 percent and 15 percent to 20 percent.

How Would That Work In Practical Terms?

Let’s say you are buying a house for $200,000 and you have $15,000 for a down payment. That comes to 7.5 percent of the total, so the first mortgage would be for $160,000 (80 percent) and the second mortgage would be for $25,000 or 12.5 percent.

Would That Be Called A 80-12.5-7.5 Piggyback Mortgage?

No. There is no such thing. That would fall under the rules of the 80-15-5 piggyback mortgage because the second mortgage (12.5 percent) is between 10 percent and 15 percent.

So, Does The Second Mortgage Have To Be Fixed?

No, it can be a fixed-rate loan or an adjustable-rate loan. (To learn more about the differences between fixed-rate and adjustable rate mortgage loans, see Understanding The Different Types Of Mortgage Loans.)

What Else Is Important To Know About The Second Mortgage?

It usually is a shorter term loan than the first and it comes with a higher interest rate than the first.

Why?

The less money the borrower puts down, the more risk the lender is taking. The second mortgage plays a large role in eliminating the need for private mortgage insurance which not only protects the lender, but it makes it easier to resell the mortgage to investors. The existence of the second mortgage brings added risk and the lender makes the borrower pay more because of that risk.

Since The Second Mortgages Have Higher Interest Rates, Can They Be Repaid Early?

Yes, but some lenders charge borrowers a pre-payment penalty which makes repaying early less attractive.

So, Should You Just Keep The Second Mortgage?

That’s an individual choice, but there are tax advantages to having the second mortgage and writing off that interest.

Are Piggyback Mortgages Used For Anything Other Than Avoiding Private Mortgage Insurance?

Yes. Avoiding private mortgage insurance is still the most common use, but they also appeal to borrowers who want to sidestep the higher interest rate of a jumbo mortgage.

How Does That Work?

Lenders make a first mortgage for an amount at or near the conforming limit of a jumbo mortgage (currently $417,000). Then they lend the rest as a second mortgage.

How Does This Help The Borrower?

A borrower has to pay higher interest for a jumbo mortgage, but if you split the mortgage into two loans it reduces the amount of interest a borrower must pay because it eliminates the need for a jumbo mortgage.

When Is A Piggyback Mortgage A Better Option Than Paying For Private Mortgage Insurance?

A piggyback mortgage makes the most sense under two scenarios: 1) when you plan to keep your house for less than five years; or 2) when you plan to refinance with the purpose of taking cash out or adding to the house. It makes sense even when you take into account the refinancing fees, especially if you refinance with the intention of getting rid of the more costly second mortgage.

Keep this information in mind if you are thinking about taking out a piggyback mortgage. The bottom line is that you should do your homework before making a final decision.

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