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What is a Piggyback Mortgage?
Also known as an 80/20, an 80/10/10 or an 80/15/5
A piggyback mortgage is when a 1st and 2nd mortgage are taken at the same time in a simutaneous closing. The 2nd mortgage is on top of (piggyback) the 1st mortgage and the downpayment or equity to make up the entire 100% of the value of the home.
This avoids the cost of PMI because the first mortgage is only 80% and fits within conforming guidelines that do not require mortgage insurance on loans where there is a 20% downpayment.
The second mortgage plus the downpayment that the borrower has available are combined to make up the remaining 20% of the value or purchase price of the home. This arrangement is valid even when both loans are with the same lender because the first mortgage can still be sold to Fannie Mae or Freddie Mac as a "conforming" mortgage.
Piggyback mortgages are also known as...
These piggyback mortgages are often called
an 80-5-15 (a 1st mortgage of 80%, a 2nd mortgage of 5%, a downpayment of 15%)
an 80-10-10 (a 1st mortgage of 80%, a 2nd mortgage of 10%, a downpayment of 10%)
an 80-15-5 (a 1st mortgage of 80%, a 2nd mortgage of 15%, a downpayment of 5%)
or an 80-20 (a 1st mortgage of 80%, a 2nd mortgage of 20%, a downpayment of 0%)
The distinction between the different type of piggyback mortgages is that different interest rates and different qualification requirements apply to the second mortgage at 5%, 10%, 15% and 20%.
While the rules change at these different levels, it is not set in stone that the downpayment must be exactly 5, 10, or 15%. It would be better to say that the rules are for a 0-5%, a 5-10%, 10-15% and a 15-20% second mortgage.
Advantages of a Piggyback mortgage
The main reason for taking a piggyback mortgae is for the purpose of avoiding PMI, mortgage insurance.
Avoiding Jumbo Loan Rates
Piggyback mortgages are also used with mortgages that would exceed the current conforming limits for a Jumbo mortgage. A first mortgage is taken up to the conforming limit, while the remaining amount of the loan amount is placed on a second mortgage.
An example of this is would be a borrower needing $400,000 and the conforming loan limit is at $359,600 (as it is in 2005) Rather than taking a Jumbo Mortgage at $400,000, the borrower would take a 1st mortgage for $359,600 and a second mortgage for the remaining $31,400 to total $400,000.
Since Jumbo rates are normally about 1/4%-3/8% higher than conforming rates, this would save this borrower about $1,000 of interest a year on the first mortgage!
Example
For example, if you were buying a home for $200,000 and had $15,000 (7.5%) for a downpayment, the first mortgage would be for $160,000 (80%) and the second mortgage would be for $25,000 or (12.5%). The second mortgage would fall under the 80-15-5 rules as it is between 10 and 15%.
Summary
A piggyback mortgage is a great tool of financing that when used properly can save you money.
Make sure to read my article comparing PMI and piggyback loans though, because there is a stigma attached to PMI that is not always deserved. In some cases, if can be more advantageous to pay PMI for a few years than to have a higher payment on the second mortgage.
The conservative borrower always ends up paying more for their mortgage. Always compare your choices and make an intelligent decision based upon your own unique situation.
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Harry
Smith
email Harry@dailyinterest.com or reach me by phone Office 1-248-548-7655 Cell 1-248-514-9000 |
Drew
Smith
email drew@dailyinterest.com or reach me by phone Office 1-248-548-7655 Cell 1-248-703-7770 |
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Piggyback Mortgage (80/20 or 80/10) description at DailyInterest.com