UNDERSTANDING A PIGGYBACK LOAN
Although not for everyone or all situations, piggyback loans can be beneficial for people who have a second mortgage. The second mortgage is a loan of which rights subordinate the first mortgage. For instance, you might have a first mortgage with one Mortgage Company, which takes first place. However, you might have taken out a second mortgage with the same or a different company by which you borrowed money against the equity of the home.
With a second mortgage, if you were to sell your home, the mortgage holder would be paid off before the second mortgage would. Now, for the piggyback loan, this term is one used by mortgage lenders as a reference to a second mortgage that closes simultaneously with the first mortgage loan. Typically, a piggyback loan would be used as a means of avoiding private mortgage insurance or PMI, which is a type of insurance that offers protection to the lender should the homeowner default on the loan.
In this case, it would be less expensive for a homeowner to secure two loans along with the interest, which would be tax deductible. Therefore, once you have 20% or more equity in the home, you can advise the lender to drop the PMI, thus saving money. If you do not notify the lender, then they would automatically drop the PMI once 22% equity is reached.
A piggyback loan is also a way of financing more than 80% of the purchase price. As an example, if you were interested in buying a home but had just 5% to put down, you would secure a loan known as an 80/15/5, which refers to the first mortgage that would finance the first 80%, the 15% that would be financed with a second mortgage, and the 5% that you put down.
Just as piggyback loans can be beneficial, there are also some downfalls. For instance, some first mortgages will allow up to 95% for the loan but in this case, you would have to pay a PMI. Typically, this kind of loan would be secured if your credit score were not high enough to qualify for a second loan. Then, remember that second loans are generally financed at a higher interest rate and usually limited to no more than $100,000. Determining if a piggyback loan is right for you, you should talk to a mortgage lender to understand all the pros and cons fully.