A common question among prospective homebuyers is, aside from making a down payment of 20% or more, how they can avoid paying mortgage insurance (MI). Most loan programs are going to require some form of mortgage insurance if the loan-to-value (LTV) ratio exceeds 80%, which of results in a higher monthly payment and reduced purchasing power. One potential option to avoid paying MI all but disappeared for several years after the housing crisis but is now beginning to slowly reappear in the market is the “piggyback” loan.
A piggyback loan is actually not a loan program at all, it is a combination of a first mortgage and a second mortgage originated at the same time for the specific purpose of avoiding mortgage insurance. The first mortgage typically finances 80% of the purchase and thereby does not require mortgage insurance. The second mortgage bridges the gap between the sales price and the amount of the down payment. These loans are often referred to by their percentages. For example, an 80/10/10 (spoken as an “eighty-ten-ten,”) consists of an 80% first mortgage, a 10% second mortgage, and a 10% down payment.
The interest rate on the 2nd mortgage is typically higher than that on the first mortgage, but the overall result is usually a combined payment that is significantly lower than the traditional scenario of one loan and a monthly mortgage insurance payment. There could potentially be some other benefits as well.
One such benefit is that the interest on both the first and second mortgages is often tax deductible. You should definitely speak with a professional tax advisor about your specific situation, but if the home you are financing is to be your primary residence and, your taxable income does not exceed a pretty high bar, and you itemize your deductions, it is likely that you will benefit from the deductibility.
Another common benefit is that you may be able to choose between a home equity loan or a home equity line-of-credit (HELOC) for your second. A HELOC is typically a reusable source of funds so, as you pay it down, you could draw on the available balance to access the money in the future. While you should evaluate each situation carefully, your HELOC could offer a lower-cost financing alternative for many other purchases.
Piggyback loans are higher-risk loans from the lender’s point-of-view so the availability of the program is often limited to well-qualified homebuyers. If you would like more information on home loan options that might work best for you and your particular situation, do not hesitate to contact me at your convenience. It would be my pleasure to answer your questions and provide you with the information you need to make informed decisions and achieve your goals.