Since the home prices are higher and it may be very hard for a individual to meet the down payment deposit then there are other methods through which people are using in order to finance the purchase of the homes. One example in this case is the piggyback loan which is a mortgage meant to help the buyer to exclude the PMI and opt for better loan terms. In this guide you will come to know what really a piggyback loan is, how does it work, advantages and disadvantages of piggyback loan along with the final conclusion about “should one go for piggyback loan or not”.
A piggyback loan is also known as (A piggyback mortgage is also known as) an 80/10/10 loan or 80/20 loan.
What is a Piggyback Loan? (What is a Piggyback Mortgage?)
Piggyback Mortgage is principally configured from consisting of the principal mortgage accompanied with the secondary one but of lesser value. Usually the first mortgage stands at 80% of the home value or sometimes the second mortgage is a home equity loan or a HELOC which is at 10%, 15% to avoid the cost of PMI for the buyer. This could be a plus to the home buyers with a good credit status but they will not be in a position to provide the 20% down payment for the traditional loans.
Piggyback Loan Lenders (Piggyback Mortgage Lenders)
Some lenders do not offer piggyback loans while other lenders who offer these kinds of loans have some extra requirements to the borrowers. Some of the lenders who offer piggyback mortgage loans are the major banking institutions, credit unions, and mortgage brokers. There are numerous lenders and each has different interest rates and terms to offer; therefore it is wise to compare different lenders.
Piggyback Loan Rates (Piggyback Mortgage Rates)
On an average, the interest rates for piggyback loans are higher for the second mortgage as compared with first mortgage rate. The second loan could be a home equity line of credit (HELOC) or home equity loan both of which come to with variable rates of interest. This means that the cost of servicing the loans may go up in future if rates of interest moves up. However, the total amount of monthly payments may be lower in comparison with the presence of PMI.
80-10-10 Loan Disadvantages
Although the 80-10-10 loan can keep PMI away these have the following cons. The second mortgage normally carries a higher rate of interest and may be variable meaning that future instalments can be higher. Secondly, coming up with two different monthly payments for the mortgage prove a huge test to some clients.
Piggyback Mortgage 80-15-5
There is another version of the piggyback loan: 80/15/5 that is, the first mortgage takes 80%, the second one, 15%, and the other 5% is the down payment. This is good for the buyers who wish to make a small down payment but at the same time they do not wish to include the PMI cost.
Piggyback Loan for Investment Property
Piggy back loan is also offered for investing trades however they permit higher requisites as compared to the initial loans. It is possible that lenders such as banks may employ higher credit scores and lower debt-to-income ratios because investment properties are risky.
80/20 Loan Pros and Cons
The second loan known also as the piggyback mortgage works towards the exclusion of PMI by using 80% of funds for the first mortgage and the remaining 20% from the second one. This can mean less expenses you need to pay at first but the disadvantage is paying two loans with the second being an adjustable-rate one.
Piggyback Loan Calculator (Piggyback Mortgage Calculator)
It is therefore helpful to use a piggyback loan calculator to find out whether a piggyback loan is good for you. These tools are developed to compare costs of getting two loans versus one mortgage with PMI. You are then able to determine which of the two is cheaper in the long run.
Piggyback Home Loan
A piggyback home loan is most preferred in the real estate areas where the down payments are very demanding for first time homeowners. It provides an opportunity to choose better loan terms instead of having one big loan and buying it with additional PMI cost.
Who Offers Piggyback Loans?
These loans are often offered by the banks, credit union and mortgage broker. However, some of the lenders do not provide them, and in case they do, there could be differences in the conditions to be met to qualify for the issue. Hence, one can should obtain the services of a lender who has adequate experience in the formulation of the piggyback financing.
Conclusion
Piggyback loans can be very useful for homebuyers who don’t want to pay for PMI and want the best loan terms, but like any other type of loans, they are not without their drawbacks. The first one relates to the fact that you are likely to attract higher interest on the second mortgage and the fact that it might be quite tricky to manage a second loan repayment. It’s important that anyone buying a home for the first time or an investment property take their time to determine whether a piggyback loan is suitable for them or not, always putting into consideration the pros and con of a piggyback loan, and also consulting a lender.
With such knowledge on how these loans operate as well as help such as the piggyback loan calculator you used, you can decide whether or not it will be beneficial for you to go for this financing solution.
Q&A on Piggyback Loans
1. What is a piggyback in finance?
Literally, a piggyback loan means then use of two loans at once in the acquisition of a home is known as a piggyback loan in finance. The first loan accounts for a large proportion, often 80% of the property value while the second loan takes a lesser proportion on average 10%-15%. This is convenient for the borrower as it enables him/her to bring down the amount of money required as down payment to between 5-10% thus eliminating the need to pay private mortgage insurance.
2. What is a piggyback loan transaction?
Actually, a piggyback loan transaction implies receiving two credits for the same home buying purpose. The first loan is a normal mortgage that usually does not exceed 80% of the fair market value of the house and the second a home equity loan or HEL 10%–15%. This setup assist the borrower in lessing the down payment that is required and also avoiding payment for mortgage insurance.
3. What is a piggyback loan rate?
Piggyback loan rates are usually split into two loans – The rate of interest of piggyback loan depends on the virtue of two loans. In the first mortgage, the rate associated with the mortgage is usually a fixed rate while in the second mortgage, the rate is usually higher. Most of the time, the second loan has a variable rate especially if it takes the form of home equity line of credit (HELOC). These rates change with market forces and therefore makes the second loan cost more than the first one with time.
4. How do you do a piggyback loan?
In order to use a piggyback loan you have to apply for two loans at once from a lender. The first mortgage will only be about 80 percent of the price of the home, while the second, the home equity loan or HELOC type of mortgage will be 10 percent or 15 percent in some cases. The buyer pays an initial deposit of the rest of the amount, that maybe 5% or 10% at most.
5. What is the piggyback loan method?
The piggyback loan method is aimed at the use of two loans when buying a house but it is also known as the second loan method. The first financing, which is usually 80% an appraised value of the property, is a conventional loan. The second and relatively smaller amount is the home equity loan otherwise known as HEL or the home equity line of credit, HELOC.
6. What are the disadvantages of piggyback loans?
Some disadvantages of piggyback loans include:
- The interest rates, for the loan are higher, than usual.
- There is a chance that the interest rates, for the loan might change and lead to monthly payments, in the long run.
- Dealing with the challenge of handling two loans and making two payments can be quite overwhelming, at times.
- Tougher standards, for eligibility like increased credit ratings and reduced debt, to income ratios.
7. What is the piggybacking rule?
The piggyback loan rule involves a scenario where a buyer of a house secures two loans in order to steer clear of PMIs (Private Mortgage Insurances). Normally the initial mortgage caters, for 80 percent of the properties worth, with the mortgage (either a home equity loan or HELOC) covering 10 to 15 percent; enabling the borrower to meet the 20 percent equity requirement and consequently avoiding PMIs.