Piggyback Mortgage, Avoid Jumbo Loans, Bridge Loans, and PMI!Piggyback mortgage solutions use a home equity line of credit with a conventional conforming first mortgage.
About Piggy Back Mortgages
A piggyback mortgage is essentially a home equity line of credit, its considered a second mortgage. Yes you can buy a home with a home equity line of credit. It may sound complicated but its really not. To put it simple you put 10.01% down on your home and then choose an amount that you would like to keep as your first mortgage. The difference between your first mortgage and the remaining amount up to 89.9% of the value would be your piggyback mortgage. For example you buy a home for $300,000, you have have to put approximately $30,000 down, you could make your piggy back mortgage $30,000 and your first mortgage $240,000. Why would you do this? The short and skinny answer is to either avoid paying private mortgage insurance, or because you expect to receive a lump sum of money after closing and you plan to pay off the piggyback mortgage. This leaves only the remaining first mortgage and a lower total payment with refinancing. The key to remember is you have the flexibility to make the piggyback HELOC the amount you choose.
The Benefits of Avoiding PMI
Unless you are putting 20% down on your conventional mortgage you will have to pay private mortgage insurance or PMI in some form or another. The rate of your PMI depends on how much you put down and your credit score, also whether the property you are purchasing is a primary residence or a second home. With conventional financing you can purchase a home with as little as 3% down for a first time home buyer, 5% for everyone else, but if you have 10% down you can utilize a piggyback mortgage and avoid PMI. The reason you might want to avoid PMI is because you will continue to pay it as long as your loan to value ratio is above 78%. Your PMI does not reduce the principal, it’s literally insurance in the case of default to compensate the bank. You could instead use a home equity line of credit (HELOC) for the remaining 10% of the sales price on top of your 10% down payment to avoid PMI.
HELOC in Action
Making a separate payment on the HELOC you can pay it down at your leisure with the option of paying only interest. Additionally once its paid down or off the HELOC is still available to access your equity if needed. At 78% LTV your PMI is required to be eliminated under the Home Owners Protection Act. There is usually a two year minimum pay period for PMI even if you are paying extra principal down. Typically just making your regular mortgage payment you wouldn’t reach a 78% loan to value ratio until year 7 if you put 10% down. Having a piggyback instead of PMI gives you the ability to avoid the extra costs associated with PMI, especially when you plan to lower your LTV to 80% sooner than 2 years.
Using a Piggyback Mortgage Instead of a Bridge Loan
Another great use of the piggyback mortgage is arguably better than using a bridge loan. When you have a home that you are trying to sell but you need to purchase a new home before it sells, a piggyback mortgage is a great tool. With a piggyback mortgage you put 10% down and then you make your piggyback HELOC an amount that you think you will clear from the sale of your home. So lets say you are buying a $300,000 home. The plan is to get $100,000 from the sale of your current home. So you have to put $30,000 down on the new home and then buy it with a $100,000 home equity line of credit as well as a $170,000 first mortgage. You will continue to pay the first mortgage and the HELOC until your old home sells. You can then pay off your HELOC with the equity from the home you just sold. Doing it this way you only have to close once. With a bridge loan, you would pay off your old existing mortgage and draw enough for a down payment on a new home, and then close on your new home. That’s two closings with less flexibility because of the percentage you can typically draw from a bridge loan. Also once the HELOC is paid off, it doesn’t disappear, you can still access it. The only potential hiccup is that you must qualify for both mortgages when using a piggyback instead of a bridge loan, but in my opinion if you can, you wind up being ahead financially and with more flexibility. A piggy back allows you to structure your purchase accommodating the equity you will receive from your old home and then applying towards your new home.
With a 680 credit score a borrower can get a piggyback HELOC up to $500,000. On a second home the minimum mid credit score is 700. The combined loan to value ratio or CLTV is also 89.99% for a second home. For calculating debt ratios the amount the borrower is using for a piggy back mortgage is amortized at a 30 year payment 2% over the start rate. The max back end debt ratio is 45% for a primary residence and 43% for a second home.
Avoid Getting a Jumbo Loan
A jumbo mortgage can come with restrictions that may make it more difficult for you to qualify for the home that you want and or make it more difficult to refinance in the future. With a piggyback HELOC mortgage you can go up to the conventioanal loan limit with your first mortgage and make the piggyback the amount you need to cover the different. You still need your 10.01% down and you are able to avoid PMI.
How is My Payment Calculated?
The interest on your home equity line of credit piggyback mortgage will be based on the prime mortgage rate plus a margin, so it’s subject to fluctuate. The margin is calculated from the borrower’s credit score and the combined loan to value. It’s an interest only payment but if the principal isn’t reduced over 10 years it’ possible for it to be converted into a fully amortized payment.
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