Table of Contents
- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
What is a Piggyback Mortgage?
Besides a borrower’s first mortgage loan, any additional mortgage or loan that is secured with the same collateral is called a piggyback mortgage.
Home equity loans and home equity lines of credit (HELOCs) are the common types of piggyback mortgages.
An additional second or third loan which is taken out on your property is a piggyback mortgage.
Second mortgages, home equity loans, and HELOCs are all examples of a piggyback mortgage.
When you want to cover down payments on a property or are looking to avoid paying PMI then piggyback mortgages are used.
Understanding Piggyback Mortgage
Several purposes can be served by piggyback mortgages. Sometimes a piggyback mortgage is allowed to help a borrower with a down payment.
Since all of the loans are secured with the same collateral, most borrowers will only have the capacity to take on one or two piggyback mortgages.
When you want to avoid having to pay for private mortgage insurance or PMI then also a piggyback mortgage can be used.
With a piggyback mortgage, home equity loan or the second mortgage is taken out at the same time as the first mortgage.
Sometimes a piggyback mortgage is called an 80-10-10 loan, where 80% of the purchase price is covered by the first mortgage, 10% is covered by the second loan, and your down payment covers the final 10%.
Which will lower your loan-to-value (LTV) of the first mortgage to under 80%, and you can avoid the need for PMI.
For example, if your new home costs $200,000, your first mortgage would be $160,000, the second mortgage would be $20,000, and your down payment would be $20,000.
Types of Piggyback Mortgages?
Down Payment Mortgages
When the borrower receives funds for a down payment then those types of piggyback mortgages are called down payment mortgages.
Second mortgages are allowed only when the funds are used for a down payment assistance program.
The first mortgage lender is required to know about all sources of down payment funds used in securing a mortgage.
Because the second mortgage is beyond the parameters of the first mortgage’s terms and there is a greater risk of default by the borrower they are not allowed from alternative lenders.
Second Mortgages
Only by using a subordinated piece of collateral, a borrower can get a second mortgage and that collateral is his home equity.
After deducting the outstanding loan balance from the home’s appraisal value you will be able to calculate the home equity.
In the early phases of a mortgage loan repayment, many borrowers find themselves in an underwater mortgage because the value of the property can decrease and the mortgage balance has not yet been substantially paid down.
A borrower has a couple of options for a second mortgage home equity loan if he has home equity in his home.
The second mortgage products are either a standard home equity loan or a home equity line of credit.
A home equity loan and a home equity line of credit are both based on the available equity in a borrower’s collateral.
Home Equity Loans
A non-revolving credit loan is a standard home equity loan. A borrower can receive the equity value upfront as a lump sum principal payment in a standard home equity loan.
Depending on credit terms designed by the lender the loan will then typically require monthly installments.
A home equity loan is used by borrowers for various purposes like college fees for their child, home improvements, debt consolidation, or emergency capital expenses.
Home Equity Lines of Credit
A revolving credit account that provides a borrower with greater spending flexibility is called a home equity line of credit.
This revolving credit account has a maximum credit limit based on the borrower’s home equity.
Since borrowers control the outstanding balances based on their purchases and payments, the account balance is revolving.
An assessed monthly interest is added to the total outstanding balance in a revolving account.
The borrowers receive a monthly statement detailing their transactions for the period and a monthly payment amount they must pay to keep their account in good standing in a home equity line of credit.
Is a Piggyback Mortgage a Good Idea?
Because your first mortgage is limited to 80 percent LTV, a piggyback mortgage loan can be an effective way to make a low down payment on a home and in the process avoiding monthly private mortgage insurance (PMI) costs.
Conclusion
In simple terms, when you take out two separate loans for the same home it is called as piggyback mortgage.
Compared to the first mortgage a second mortgage usually carries a higher interest rate, and it can be eliminated only when you have paid the loan off another option is opting for a new stand alone mortgage by refinancing the first and the second mortgages.
