Owning a home is the ultimate dream for many, but the financial burden of a down payment and mortgage insurance can be daunting. But what if there was a way to bypass these financial hurdles and make homeownership more attainable? Enter piggyback loans. A unique mortgage solution that can potentially save you money and make your homeownership dreams come true. Are you ready to discover how a piggyback loan can help you save money?
Piggyback loans provide an alternative mortgage solution, combining a primary and second mortgage to cover 90% of the purchase price.
Advantages include avoiding PMI and Jumbo Loan requirements. But, closing on two mortgages can be costly with potential risks.
Eligible borrowers must have strong credit scores and low debt-to-income ratios. Other alternatives such as low down payment programs or first time homebuyer loans are available for some of those looking to achieve homeownership.
A piggyback loan, also known as an 80-10-10 mortgage, offers the following benefits:
Allows you to avoid private mortgage insurance
Navigates around jumbo loan requirements
Makes homeownership more accessible to those with limited down payment savings
But how exactly does a piggyback loan work? Let’s dive deeper into the world of piggyback loans and uncover the secrets behind this mortgage solution.
A piggyback loan is a combination of a primary mortgage covering 80% of the home’s value and a second mortgage, usually a home equity line of credit (HELOC), covering 10%. This unique arrangement allows borrowers to make a 10% down payment and obtain two mortgages totaling 90% of the purchase price, reducing the need for mortgage insurance or strict lending requirements.
The first mortgage is typically structured as a traditional 30-year fixed-rate mortgage loan, while the second mortgage, the piggyback is usually a HELOC with variable interest rates. This innovative loan structure can be a game-changer for those looking to buy a home without the burden of a hefty down payment.
Piggyback loans work by allowing borrowers to make a 10% down payment and obtain two mortgages totaling 90% of the purchase price, thus reducing the necessity for mortgage insurance or rigorous lending criteria. This unique mortgage solution enables borrowers to replicate a 20% down payment with only 10% out of pocket, allowing them to benefit from lower rates and circumvent private mortgage insurance (PMI) without the need for additional savings.
The objective of a piggyback loan is to help borrowers circumvent PMI, avoid higher interest rates, or abstain from taking out a jumbo loan. By offering flexible loan combinations, piggyback loans provide borrowers with more financial freedom and security, ultimately making the dream of homeownership more attainable.
Like any financial decision, piggyback loans come with their fair share of advantages and disadvantages. Depending on your financial situation and goals, it might be the perfect time to get a piggyback loan or it might not be the best fit.
Let’s explore the pros and cons of piggyback mortgages to better understand if they are the right choice for your home purchase.
One of the major benefits of piggyback loans is the ability to avoid private mortgage insurance (PMI) and bypass jumbo loan requirements. PMI is an insurance policy that lenders require when a borrower is making a down payment of less than 20% on a home. By obtaining a piggyback loan, you can effectively avoid the added cost of PMI, potentially saving you thousands of dollars over the life of your mortgage. PMI is not cheap and may be difficult to have removed later even if your equity has built up.
Another advantage is the ability to surpass jumbo loan limits, which are mortgages that exceed loan limits established by Fannie Mae and Freddie Mac. Jumbo borrowers may enjoy a more favorable mortgage rate by supplementing the down payment with a second mortgage. In essence, piggyback loans provide an opportunity to capitalize on lower rates without the restrictions associated with jumbo loans.
While piggyback loans offer significant advantages, they also come with their own set of drawbacks. One of the major disadvantages is the necessity to close on two distinct loans, which can be time-consuming and costly. Additionally, the second loan, also known as a second mortgage, typically has a higher interest rate, which add to the overall expense of the loan.
Another potential risk associated with piggyback loans is the variable interest rates of HELOCs. These rates can fluctuate from month to month depending on market conditions, making it difficult to predict your monthly payments. Homeowners usually make minimum, interest-only payments on the HELOC during the initial draw period (usually 10 years). This usually leads to a slower rate of building equity. This slower equity building process might be a concern for those looking to build wealth through homeownership.
To qualify for a piggyback loan, borrowers must meet certain requirements, such as having a strong credit score and a low debt-to-income ratio. These qualifications are essential to ensure that borrowers can manage the financial responsibility of two mortgages, while also meeting the lending criteria set forth by mortgage lenders.
Let’s delve into the specifics of these requirements and qualifications to better understand the eligibility criteria for obtaining a piggyback loan.
A credit score of 680-700 or higher and a debt-to-income ratio no higher than 43% are typically required for piggyback loans. A good credit score showcases your creditworthiness to lenders demonstrating that you are a responsible borrower and can manage debt efficiently.
The debt-to-income (DTI) ratio, on the other hand, quantifies the proportion of an individual’s income allocated to debt payments. By maintaining a low DTI ratio you in affect are signaling lenders that you have a manageable debt load and are less likely to default on your loans.
Meeting these requirements is crucial to securing a piggyback loan and enjoying the financial benefits it offers.
The process of obtaining a piggyback loan involves applying for two separate loans, often from different mortgage lenders and going through two separate closings. This can be a complex procedure, requiring careful coordination between the primary and secondary mortgage lenders to ensure a smooth transaction.
To successfully apply for two mortgages, you must furnish the mortgage lender with your financial details, including your income, assets and credit score along with documentation of the property you are purchasing. Upon the lender’s approval of your application, you must go through the closing process for both mortgages, solidifying your commitment to this unique mortgage solution.
If a piggyback loan doesn’t seem like the right fit for your financial situation, there are alternatives available that can help you achieve your homeownership goals. These alternatives include low-down-payment mortgage programs, first-time homebuyer loans and down payment assistance programs that can help with upfront costs.
Let’s explore these alternatives in more detail to help you make an informed decision about your mortgage options.
Low-down-payment mortgage programs such as VA and USDA loans can help eligible borrowers avoid the need for a piggyback loan. These government-backed programs offer qualified borrowers the opportunity to purchase a home with a smaller down payment making homeownership more accessible for those with limited savings. In contrast, a conventional loan often requires a larger down payment.
By taking advantage of these low-down-payment mortgage programs, you can reduce the financial burden of your home purchase and potentially save thousands of dollars in the long run.
First-time homebuyer loans and down payment assistance programs can provide financial assistance for those looking to purchase a home without the need for a piggyback loan. These programs cater specifically to first-time homebuyers, offering reduced down payments, lower interest rates and access to grants and other financial assistance to help make homeownership a reality.
By exploring these first-time homebuyer loans and down payment assistance programs, you can find a mortgage solution that meets your needs and allows you to achieve your dream of homeownership without the added complexity of a piggyback loan. Our preferred lender can assist you.
Current homeowners considering piggyback loans can use strategies such as leveraging their home equity to cover the down payment on a new home. This can be an effective way to minimize the financial burden associated with purchasing a new home and make the process more manageable.
Let’s take a closer look at how current homeowners can use their home equity to their advantage, especially when considering a home equity loan or piggyback loan.
A loan secured by the current home’s equity can be used to cover the down payment on a new home thereby eliminating the need for a piggyback loan. By tapping into your home’s equity, you can reduce the financial burden of your new home purchase and potentially save thousands of dollars in interest and fees over the life of your mortgage.
This strategy allows you to utilize the value of your current home to fund your new home purchase giving you more financial flexibility and control over your homeownership journey.
Refinancing piggyback mortgages can involve paying off the second mortgage or leaving it untouched through a subordination agreement. Depending on your financial goals and circumstances, refinancing your piggyback mortgage can help you save money, reduce your interest rate or shorten your loan term.
Let’s explore the options for refinancing piggyback mortgages and how they can benefit you.
To refinance a piggyback mortgage, borrowers can pay off the second mortgage, which may require additional funds or a new loan. By settling the second mortgage, borrowers can enjoy numerous benefits such as heightened equity, decreased monthly payments, advanced credit scores, diminished interest costs and a streamlined financial situation.
Paying off the second mortgage can be a smart financial move, allowing you to take control of your debt and make the most of your homeownership experience.
Subordination agreements allow borrowers to refinance their primary mortgage while keeping the second mortgage in place, avoiding the need to pay off the second mortgage during the refinancing process. This can be a convenient option for borrowers who want to take advantage of lower interest rates or adjust their loan terms without the added expense and hassle of paying off the second mortgage.
By considering a subordination agreement, you can maintain the benefits of your piggyback mortgage while still achieving your refinancing goals.
In summary, piggyback loans can be a powerful tool for borrowers looking to save money, avoid PMI, and navigate around jumbo loan requirements. However, it is important to weigh the pros and cons of piggyback loans, understand the requirements and qualifications and explore alternative solutions before making a decision. By carefully considering your options and employing the strategies discussed in this blog post, you can make the dream of homeownership a reality and secure your financial future.
A piggyback loan is another name for 80/10/10 loans, which are used to pay off credit card debt or other financial hardships and typically involve a second mortgage.
These loans are a great way to get out of debt quickly and efficiently, as they allow you to pay off your debt with a single loan. The loan is split into two parts, with the first part being the primary mortgage and the second part being the piggyback.
FHA loan borrowers cannot do a piggyback loan to avoid mortgage insurance premiums.
It is advisable to compare preapproval offers from several lenders to get the best rate and find out if you qualify for any special financing programs.
You can have two separate mortgages on the same property, commonly referred to as a piggyback mortgage. This involves taking out two loans for the same home - the first at 80% and the second at 10%, with the remaining 10% paid as a down payment. Alternatively, you can opt for home refinancing instead.
Piggyback loans offer several benefits, such as avoiding PMI, bypassing jumbo loan requirements, and potentially securing better mortgage rates.
Piggyback loans can present potential risks associated with HELOC interest rates and require two separate loan closings, making them slower for building equity.
However, they can also be beneficial for those who need to borrow a large amount of money and don’t have the credit score or income to qualify for a single loan. Piggyback loans can also be used to avoid private mortgage insurance.
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407-575-5392
Wendy Morris LLC
DBA Wendy Morris Realty
Licensed in the State of Florida
BK 3146762
16797 Broadwater Avenue
Winter Garden, Florida 34787
