Can I give you a Piggy Back?

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).

The Piggy Back

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

 Bill Nickerson 

FHA to Increase Fees Once Again…

Effective April 1^st…funny April Fool’s joke….NOT!  FHA announced this past Monday that the cost of government-insured mortgages will increase slightly for some new homebuyers.  The rise in up-front fees on mortgages was deemed necessary to build up dwindling capital.

FHA is increasing what is known as the Upfront Mortgage Insurance Premium “Upfront MIP” from 1.00% of the loan amount to 1.75% of the loan amount.  This fee is added directly to the total loan along with the monthly mortgage insurance premium.

So, on a $200,000 loan amount, based on today’s rate of 1.00%, you would pay $2,000 in MIP; with the new increase of 1.75% you would be paying $3,500 to the loan amount; an increase of $1500.  Then you add in a monthly mortgage insurance premium of 1.1% per thousand which costs $183 per month.

Although the FHA’s acting commissioner, Carole Galante, states this will raise the average homeowners payment by only $5 per month, FHA consumers are already paying about $183 more a month than those consumers that don’t pay any mortgage insurance.  Such programs as the Masshousing Loan that allows a 3% down payment with no mortgage insurance can save homeowners thousands of dollars over the course of the term of the mortgage.

The FHA fees which were just raised in the last year affected current FHA holders by preventing them from refinancing to lower rates.  The increased fees have become so high; it did not make sense for many homeowners to drop their rate a full percent.  This latest move will result in much higher costs to buyers.  A mortgage rate of 4.00% will be a net rate of 5.400% when you factor in the mortgage insurance. This is a difference in $170 per month higher payment for FHA clients compared to those who may obtain the Masshousing Loan with No Mortgage Insurance

Several economists when interviewed in regards to this latest increase agreed this would have a negative impact on the already struggling housing market.  First time home buyers represent a large percentage of the market and with these additional costs it will discourage many new buyers from entering the housing market in areas that need it most.

The FHA program was designed to be a very affordable alternative for those with a low down payment and credit that was considered less than perfect.  The FHA mortgage is still a very good option for those with credit scores under 680, but new alternatives are becoming available every day and consumers should look at all their options.

When shopping for a mortgage, make sure your lender offers Masshousing, FHA, USDA, Fannie Mae and Freddie Mac, this will allow to compare all the programs available to ensure you are getting the best possible option and the most cost effective mortgage.

Please contact me with any questions you may have regarding this article:  bill@billnickerson.com