What’s a Piggyback Loan? A Homebuyer’s Guide to Creative Financing

A piggyback loan, also known as a second mortgage, is a financing strategy used by homebuyers who are unable to afford a large down payment. This type of loan is created in conjunction with the primary mortgage, and it is designed to provide additional funds to borrowers who otherwise might not qualify for a primary mortgage without having to pay for private mortgage insurance. Some of the most significant benefits of a piggyback loan include:
  • Lower down payment: A piggyback loan can help homebuyers reduce their down payment to 10% or even 5%. This can be a significant savings, especially for those who are cash-strapped or have other financial obligations.
  • No PMI: By putting down less than 20% in a down payment, homeowners are required to pay for private mortgage insurance (PMI) to protect the lender in case of default. Piggyback loans allow homeowners to avoid this extra monthly payment and save money.
  • Fixed and flexible payment options: Piggyback loans come in many forms, from home equity loans to HELOCs. Depending on which type of loan you choose, you can have either a fixed or variable interest rate. This flexibility makes it easier for borrowers to budget for monthly payments and choose the loan that works best for their financial goals.
  • Easier to qualify: Piggyback loans are easier to qualify for than a single large mortgage. This is because the borrower can show that they have two separate sources of financing to purchase the home, which makes them less risky to the lender.
  • Potential tax benefits: Depending on how the piggyback loan is used, homeowners may be able to deduct some or all of the interest paid on their income taxes. This can help them reduce their taxable income and save even more money.
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    Overall, a piggyback loan can be a smart financial strategy for those who need additional funds to purchase a home. By working with a lender to create a custom financing plan, homebuyers can avoid PMI, lower their down payment, and choose a payment option that fits their budget.

    Understanding The Piggyback Loan Concept

    A piggyback loan is a way to secure additional funds in conjunction with your primary mortgage, making it possible for those with lower savings for a down payment to borrow extra funds and become eligible for a primary mortgage without having to pay for private mortgage insurance. A piggyback loan is also called a second mortgage, and it can either be in the form of a home equity loan or a home equity line of credit (HELOC). The concept of a piggyback loan is simple. An individual takes out a primary mortgage for the first 80% of the home’s value. Meanwhile, the piggyback loan makes up the remaining 20% of the home’s value in the form of a second mortgage. This way, the borrower does not fall under the 20% down payment threshold and, therefore, is not subjected to private mortgage insurance.

    Advantages of a Piggyback Loan

    The primary advantage of a piggyback loan is that it can help borrowers avoid costly private mortgage insurance premiums, which can sometimes cost between 0.3% and 1.5% of the original mortgage amount annually. Moreover, a piggyback loan can also help lower monthly payments and overall interest costs compared to a single mortgage with private mortgage insurance. This is because piggyback loans typically have a shorter term than primary mortgages, which results in lower interest rates. Additionally, payments made to a primary mortgage can be tax-deductible, making the entire mortgage arrangement more affordable for the borrower.
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    Types of Piggyback Loans

    There are two types of piggyback loans: the 80-10-10 and the 80-15-5. The 80-10-10 piggyback loan involves taking out a primary mortgage for 80% of the home’s value and using a piggyback loan to account for the remaining 10% of the down payment. The borrower then pays the remaining 10% via either cash or a second loan. The 80-15-5 piggyback loan involves taking out a primary mortgage for 80% of the home’s value and using a piggyback loan to cover 15% of the down payment. The borrower must then pay the remaining 5% as either cash or a second loan.

    Factors to Consider before Taking a Piggyback Loan

    Before diving headfirst into the process of obtaining a piggyback loan, there are several factors borrowers must consider. Firstly, borrowers must determine if their credit score is high enough to secure such a loan. Piggyback loans generally have stricter credit score requirements, so borrowers must ensure that their credit ratings meet those standards to qualify. Secondly, borrowers must understand that piggyback loans involve paying an additional mortgage, which, depending on the loan’s terms, could have higher interest rates than the primary mortgage. Finally, borrowers must calculate all the costs associated with both their primary mortgage and piggyback loan, including application fees, processing fees, and ongoing interest charges.

    How to Qualify for a Piggyback Loan

    Qualifying for a piggyback loan requires the same basic steps as qualifying for a primary mortgage. The first step is to find a lender who offers piggyback loans. Ensure that the lender offers options for both home equity loans and HELOCs.
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    Next, gather all the necessary documents required by the lender, including income statements, credit reports, and tax returns. With all these documents, the lender will determine whether the borrower qualifies for a piggyback loan.

    The Application and Approval Process for Piggyback Loans

    The application and approval process for a piggyback loan is almost identical to a primary mortgage. However, there are additional creditworthiness checks and documentation that borrowers need to provide since it involves taking on the risk of a second loan. Once the application is submitted, the lender will assess the loan’s viability against set criteria. If the loan is approved, the borrower can begin taking the necessary steps to close the loan successfully.

    Prospective Risks and Downsides of Piggyback Loans

    While piggyback loans are an ingenious way of gaining access to necessary funds, there are some downsides and risks associated with them. Foremost, piggyback loans have higher interest rates than primary mortgages, making them more expensive overall. Piggyback loans also mean that borrowers have to make an additional monthly payment, which has serious implications on the borrower’s finances. Additionally, piggyback loans come with the risk of foreclosure, as borrowers must pay back both the primary mortgage and the secondary loan. Failure to do so could lead to the lender foreclosing on the borrower’s property. In conclusion, piggyback loans are an excellent option for those without significant savings for a down payment on a home. These loans come with several advantages and disadvantages that all borrowers must consider before taking on the additional debt. Nonetheless, with the right financial advice and an understanding of how piggyback loans work, this extra funding could be the best way of landing your dream home.

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