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The Advantages and Disadvantages of a Piggybank Mortgage Loan

The majority of homebuyers find a traditional 30-year mortgage, along with a fixed interest rate, most suitable. But more often than not, you wish to get a home for yourself but don’t have the ideal circumstance in your favor. In situations when you don’t enough savings required to make a downpayment, there is only a single way out and that is to bifurcate the loan. Opting for a piggyback mortgage can actually help you purchase a house. However, like with many financial decisions, you have to take into account and consider its downsides before proceeding. If you’re planning to avail a piggyback mortgage but you’re still unsure, read more about it below!

What Exactly Is A Piggyback Mortgage?

A piggyback mortgage comes into play when you split up your home loan into two separate loans. In simple language, the first mortgage is calculated at 80% of the current value while the second loan is calculated at 10%. The remaining 10% is what you have to shell out as down payment — you can call this an 80-10-10 loan, too. With that being said, lenders might also give their nod to an 80-15-5 loan or an 80-5-15 mortgage.  The first digits correspond to the primary loan amount, whereas the second digits correspond to the secondary loan amount.

The History Of Piggyback Mortgage

Prior to the housing crisis in 2000, a number of lenders offered loans to those who couldn’t shell out the conventional 20% downpayment. Records reveal that one-fourth of all borrowers availed a piggyback mortgage back in 2006. This piece of information was given out by the Furman Center for Real Estate and Urban Policy. Now, this implies that borrowers availed two home loans – one for the downpayment of 20% and another one for the remaining 80%. After the housing crisis was resolved, several homeowners discovered themselves having negative equity. This forced them to default on their individual home loans. Additionally, availing two mortgages proved to be disadvantageous as it wreaked havoc when the homeowners made an attempt to procure a short sale approval or a loan modification. After the housing recovery, piggyback loans have more or less been restricted to 90 percent loan-to-value.

The Pros of Piggyback Mortgages

People prefer availing piggyback mortgages in order to steer clear from private mortgage insurance. Abbreviated to PMI, this is the kind of insurance policy which you need to have, especially when you are shelling out less than a 20% downpayment.  In case you become a defaulter, PMI will make sure that the lender will procure the lost sum. The amount for a PMI differs as it depends on the size of the amount you are availing on a loan. As per the recent rules and regulations, the figure lies between 0.3% and 1.5% of the total loan value. When you are availing a piggyback mortgage, the PMI rules are actually not applicable. Hence, the mortgage payment that you shell out every month doesn’t get affected. Aside from that, you are eligible to deduct the amount of interest you pay from the taxes.

The Cons of Piggyback Mortgages

While piggyback mortgages can be ideal for you in case you are not able to make a 20% downpayment, it might turn out to be more expensive than you had originally expected. Because you are availing two loans in one go, you will have to shell out the closing costs on not only one but both of them. This means spending double like paying for the origination fee and the lender’s administrative fees. The second mortgage that you have availed would naturally carry an interest rate that’s higher than the first. You can cancel out PMI once the loan value plunges below 80% of your home’s value. However, you can’t get rid of the second mortgage unless and until you are able to pay that off.

Before you think of opting for two separate home loans, do a detailed calculation in order to ensure that you are saving enough money. The smartest way to save a significant sum of money during the tenure of your home loan is to be patient and wait until your pockets are full enough to make the substantial down payment. This is the only way you can avoid taking PMI or two different home loans.

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