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How Does a Piggyback Mortgage Loan Work?


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TERMINOLOGY

A piggyback mortgage is a type of loan that is used in order to avoid paying for private mortgage insurance. This type of loan can be beneficial, depending on your situation. A piggyback mortgage is another term for a second mortgage. With this type of loan, you are going to get a primary mortgage on 80 percent of the value of the home. For the remaining 20 percent of the price, you are going to finance the rest with a secondary loan. This loan is going to take a junior position to the first mortgage. In some cases, people will pay cash for 10 percent of the property and then get a piggyback mortgage for the remaining 10 percent.

Avoiding PMI

When you get a traditional mortgage, and you do not have 20 percent for a down payment, the lender is going to charge you private mortgage insurance, or PMI. This is a type of insurance that is designed to protect the lender from the risk of default. If you default on the loan, the PMI is going to provide a payment to the lender and the lender will get to keep your house as well. This means that you are essentially paying money in order to reassure the lender. Your premium for this insurance is going to be added onto your monthly mortgage payment. In many cases, the increase can be significant.

Many people do not want to have to add that onto their mortgage. In order to get around paying private mortgage insurance, you could get a piggyback mortgage. With this type of loan, the primary mortgage will only be at 80 percent of the value of the home. Since the loan does not exceed that amount, then you should be able to avoid paying private mortgage insurance.

Interest Rate

Even though you will be able to avoid paying private mortgage insurance, you should be aware that the interest rate is going to be higher. The lender that gives you the piggyback mortgage is taking additional risk because they are taking a secondary position on the home. This means that they have to compensate for this risk by charging you more money. In most cases, you are still going to come out ahead because you are not having to pay the private mortgage insurance.

Even though the rate will be higher than the first mortgage, it is usually less expensive than having PMI. Also, many people opt for piggyback mortgages because the interest on the loan can be tax deductible.

Two Payments

With this type of loan arrangement, you are going to have to make two separate mortgage payments every month. While this is not a huge problem, it can be a minor in convenience for some people. You will just have to remember to make the payments in order to avoid late fees. Also, many people have automatic deductions to pay for the two mortgages to be sure it is paid timely.