The 80/10/10 Piggyback Mortgage Is Often The Cheapest
Piggyback Mortgages And The 80/10/10
NSH Mortgage has the knowledge and tools to help you understand 80/10/10 Piggyback Mortgage and what is required to obtain it. As the economy improves, U.S. lenders have made an additional low down payment mortgage options more accessible to today’s home buyers the piggyback mortgage.
Piggyback mortgages, which are also known as piggyback loans, were a mortgage lending fixture last decade. The product fell from favor as home values dropped somewhere between 2007 to 2010. The 80/10/10, pronounced: Eighty-Ten-Ten, is another reference for piggyback mortgages and, even today their availability is slowly returning.
With government reporting home values were up 40 of 41 months, banks are now re-opening access to 80/10/10s. This is helping to further home-ownership nationwide especially among home buyers who want to buy a new home before their current one is sold. Piggyback mortgages make loans available with just a 10% down payment; while helping buyers to avoid the mortgage insurance payments typically associated with low down payment loans.
Want to buy a home but do not have 20 percent to put down? The piggyback loan may be a good fit.
What Is A Piggyback Loan?
A piggyback loan is actually two mortgage loans. The first loan is a mortgage for your borrowed amount, and the second loan is a mortgage for what remains. This loan is commonly known as a piggyback mortgage due to the second mortgage piggybacking off the first loan, combining to make a loan size for the total amount that you wish to borrow.
Piggyback loans are generally available up to 90% loan to value (LTV) on the purchase price, with the first lien typically comprising 80% of the price, and the second piggyback mortgage comprising 10% of it. This particular structure is known as a 80/10/10. When you read 80/10/10, the 80 depicts the LTV of the first mortgage, the ten depicts the LTV of the second mortgage and the last ten depicts the down payment which the borrower makes on its own.
With piggyback loans, most often, the 80% portion is a 30 year fixed rate mortgage and the 10% portion is a home equity line of credit (HELOC). Another typical piggyback structure is the 75/15/10. With a 75/15/10, the first lien is for 75% of the purchase price, the second lien is for 15% of the purchase price, and the remaining 10% is the borrower’s down payment on the home.
It is common to see the 75/15/10 used with the purchase of a condominium. This is because mortgage rates for condos are higher when the LTV of the first lien exceeds 75%. To avoid paying higher rates, than, condo buyers will limit their first lien size to 75 percent. The remaining 15 percent is managed by the HELOC.
Other buyers will use piggyback loans because they are buying a home which exceeds their local mortgage loan limits. Through the piggyback loan, they can borrow up to $424,100 with their first lien, and then borrow the additional amount required through a second loan. For reference say a buyer in Miami who plans to make a 20% down payment on a $600,000 home may choose a first mortgage of $424,100. And a second, piggybacked mortgage of $55,900 for a total of $480,000 or, 80% of the purchase price. There are many reasons to consider using piggyback loans.
Piggyback Loans Avoid PMI
Because piggyback loans limit your first lien to 80% LTV, they can be an effective way to make a low down payment on a home while avoiding monthly private mortgage insurance (PMI) costs. For some buyers, this is their reason for using piggyback loans at all. Some buyers will do whatever possible to avoid paying PMI.
As a real life example of how piggyback loan works, let’s consider a home buyer in Denver, Colorado with good credit who is purchasing a home for $400,000, and wishes to make a maximum down payment of $40,000, or ten percent. Assuming that this is not a military borrower who could use the VA Loan Guaranty program, there are several mortgage options available to the buyer:
- The Conventional 97 program, which allows for three percent down.
- The FHA mortgage loan, which allows for 3.5% down.
- The HomeReady™ loan, which allows for 3% down.
- A conventional loan at 90% loan to value.
- A 80/10/10 piggyback mortgage.
For this particular buyer, the Conventional 97 will not be the best fit because private mortgage insurance rates and mortgage rates for a borrower making a 3% down payment is slightly higher than for a borrower making a 10% down payment. A FHA loan may not be the best fit, either, because, with ten percent down, it is often cheaper to use conventional financing at 90 percent LTV. So that leaves the 90% conventional loan, the HomeReady™ loan, and the piggyback as the three remaining choices.
With one loan at 90% LTV, the buyer will pay PMI charges monthly. They will also pay higher rates and fees for the right to make a down payment of just ten percent. Although the PMI is just temporary, the higher rate is permanent, which adds to long term costs. And to qualify for the HomeReady™, home loan often, your home must be located within certain census tracts or, your annual household income must be within certain limits.
For most people, then, the piggyback loan emerges as the winner. The buyer should get a first mortgage for $320,000 and an additional mortgage for $40,000, totaling $360,000.
Piggybacks Loans For Financial Planning
Piggyback loans exhibit another different improvement over other one loan programs. Since they can be used as remarkable tools for financial safety and planning. This is because of how the piggyback loan is structured. Remember that the first lien in a piggyback loan is usually a fixed rate mortgage, for up to 80% of the house’s purchase price and that the second lien is often a home equity line of credit HELOC.
HELOCs are extremely flexible in that they function similar to a credit card. Except that the balance of a HELOC begins as maxed-out whereas on a credit card, the balance starts at zero. This implies that you can pay down your HELOC at any time, allowing yourself the capacity to borrow should you ever need to. For example, if you pay $10,000 to reduce your HELOC balance at any time during its existence. Later you can write yourself a $10,000 check against the HELOC to use for any purpose necessary.
You can even pay your HELOC in full then leave it open for future use. Home buyers who have to buy a new home before selling their old one will use this trick. They will buy the new home with a 80/10/10 and then, after their trailing home sells. They will use the proceeds to pay the HELOC down in full.
This ten percent cushion can then be used if in an emergency, for home improvements, or for any other purpose. Comparable to the credit card, there is no interest added when no money is borrowed. Which grants the still open HELOC an effective tool for planning.