Whether you call them Piggy Back Loans, Blended Mortgages, A first and second, 80-10-10, these loans are extremely helpful in avoiding Private Mortgage Insurance (PMI).
When you have less than 20% to put down on a home, you are charged Private Mortgage Insurance, this added cost is based on the actual down payment as well as your credit score and in some cases can be in the hundreds of dollars per month. Several years ago, many banks, lenders and mortgage companies created a program that would allow having a first and second mortgage to avoid the high cost of mortgage insurance. At the end of the Housing Bubble, many banks, lenders and mortgage companies went out of business, these second mortgage and lines of credit nearly disappeared. They were still available, they were just really hard to find.
Based on your purchase price, you would take out a first mortgage in the amount of 80% of the price and a second loan in the amount of 10%. You would still be borrowing 90% of the purchase price (10% down payment). In doing so, you have lowered the loan-to-value ratio (LTV) of a first position mortgage to under 80%, thereby eliminating the need for private mortgage insurance (PMI).
Example: Here is a comparison of using the Piggy Back Mortgage versus a mortgage with PMI. This is based on a purchase price of $400,000 with 10% down on a single family home and assuming a credit score of 740 or greater.
Without the Piggy-Back: You would have a first mortgage of $360,000, using a mortgage rate of 4.5% on a 30 year fixed. This would give you a mortgage payment with PMI in the amount of $1,980.07. $156 of this payment would be PMI. PMI payments do vary based on the actual down payment as well as the credit score of the borrower, but this will give you a good idea of what the payment would be.
With a Piggy-Back loan using the same purchase price. In this example you would have a first mortgage in the amount of 80% of the purchase price, $320,000 and a second mortgage in the amount of $40,000. The second mortgage can also be a line of credit and in both cases the second mortgage rates is typically higher. Using a rate of 6.00% for the second, this gives you a total mortgage payment of $1,861.21. This is a total savings of $118.86 per month. This is a conservative estimate.
The savings can be in the hundreds, most of these piggy-backs are in the form of a Line of Credit (home equity line of credit) and are adjustable rate products. This rate is tied to the Prime Rate that the Federal Reserve sets and can be adjusted a few times a year. Even though the rates are still at all-time lows, these lines of credit will go up in the future. When obtaining a piggy-back mortgage, you need to have a strong financial plan of how you can either make additional payments to this loan or be in a position to pay it off within several years.
For more information in regards to Piggy Back mortgages and other programs that eliminate mortgage insurance, feel free to call or email me anytime.
Bill Nickerson -NMLS #4194 978-273-3227 cell