Most home buyers take out just one mortgage loan. But some people get a piggyback mortgage.
A piggyback mortgage actually happens when you get two separate loans. One of them is your primary mortgage loan. And the other is also a secured mortgage loan that you get instead of making a larger down payment.
There are pros and cons to a piggyback mortgage. But if you can’t pay a traditional 20% down payment, securing one is definitely worth considering. Here’s what you need to know about how this loan type works, as well as some advantages and disadvantages to think about.
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How does a piggyback mortgage work?
Traditionally, borrowers were required to make a down payment totaling 20% of their home’s loan value, but a substantial number of people no longer do that.
If you don’t put down 20%, typically you have to pay for private mortgage insurance, or PMI. This can be expensive, with premiums sometimes equaling as much as 2% of your loan amount. And although you pay for it, PMI doesn’t actually provide you any protection — instead, it ensures your lender won’t lose any money if they have to foreclose on you.
A piggyback mortgage is a way to avoid PMI. When you use this option, you’ll take out a mortgage loan for 80% of your home’s value. Then, you’ll take out a second loan — your piggyback mortgage — to pay for the down payment.
Lenders used to allow you to borrow the full 20% you’d traditionally put down — prior to the 2008 mortgage crisis. At the time, piggyback mortgages were often called 80-20 loans. Now, most lenders want you to put at least some amount down, so it’s more common to put 10% of your own money down, take a piggyback loan for the other 10%, and then take your regular mortgage for 80% of your home’s value.
What are the pros and cons of a piggyback mortgage?
The key advantages of a piggyback mortgage include:
- No PMI
- The option to deduct the interest on your second loan (as long as the loan doesn’t exceed $100,000)
- Ability to pay back your second loan more quickly
However, there are also big disadvantages:
- You usually have to be a well-qualified borrower to be eligible
- Your second loan will generally have a higher interest rate than your first one
- You’ll have to pay closing costs for both loans, which can be expensive
- You’ll risk owing more than your home is worth
Carefully consider the pros and cons as you decide if a piggyback mortgage is right for you. The ideal situation would be to put 20% down, but if you can’t and you want to avoid PMI, taking a piggyback mortgage may be a good option if you qualify for one.
View more information: https://www.fool.com/the-ascent/mortgages/articles/a-piggyback-mortgage-could-save-you-pmi-but-is-it-right-for-you/