 Sam
Site Admin
Joined: 21 May 2005
Posts: 211
Location: CALIFORNIA
97.74 Dollars($)
|
 Posted: Tue Jan 18, 2005 1:29 am Post subject: Piggyback Mortgage |
|
|
Piggyback Mortgage too is an answer to lender-friendly private mortgage insurance (PMI) premiums. Earlier a person who borrowed 80% of the equity of the house had to take a PMI as well. This is because down payment amount decreased.The down payment is always a commitment of assured future repayments. This added to the costs in a big way; being non tax-deductible.
Piggyback Mortgage was introduced just 4 years back and is fast gaining in popularity. This is nothing but a deal with two loans added one on top of the other. This is available in various forms:
- 80-10-5
- 75-10-15
- 80-10-10, etc.
An 80-10-5 structure means: you take a loan (at fixed rate or adjusted) at 80% of the price of the house and then you take another loan against 10% of the remaining or 5% of the same. This could also extend to 20%. In which case there is no down payment to be made.
Thus the second loan is said to be piggybacked on the first loan. But the interest rate of the second will always be higher than the first with chances of default more.
This could be adjusted in a manner so that the second mortgage could be paid off earlier and faster. This results in only the first mortgage and so lesser monthly payments thereafter. Down payments could be made zero in the bargain.
Though it was started to circumvent the PMI which weighed heavily on the borrower,piggybacked mortgages have other benefits as well:
- Allows you make use of the equity in the house.
- Pay off second loan faster without penalty.
- Avoid high interest rates associated with jumbo loans.
- Save time and money.
PMI vs. Piggyback Mortgage
With the down payment cut off set at 20% by the Federal Government, making cash for down payment has become an extremely tedious process. Because as this value becomes lesser with more amount borrowed, the risk factor increases.That is why the mortgage insurance was instated. Even if the borrower does not pay, the lender can recover in part from the insurance money.
The borrowers on the other hand could not sustain the huge monthly repayments with the PMI added, so they have always tried a variety of ways to avoid this. Piggyback to them is god sent. But they fail to forget that, after 20% of the equity of your home has been regained you can easily by a request to the lender do away with the PMI.
Piggy back on the contrary is a term based mortgage and need to continue throughout that time period. The only solace being the tax-deductibility. And it is divided into two mortgages, one among them can be paid off easily, with circumstances.
How piggyback helps the jumbo loaners?
Borrowing of amounts higher than $333,700 (current rate) is called a jumbo
loan. The lenders too are at a high risk because of the huge payments involved.The regular enormous repayments can be avoided by dividing the jumbo loan to a 'minor jumbo' and a 'major jumbo'.
Say you need a loan of $380,000, and then you can have two mortgages, One for $330,000 and another for $50,000, thus it becomes typically a piggyback mortgage as the major jumbo is touching 80% while the other is lesser. Instead of the conventional one-eighth to one -fourth percentages in case of jumbo loans,one can avail a lower interest rate for the major and a larger rate for the minor.
For e.g. If the rate for the major is 6% and for the minor is 9% then the monthly amount for 30 years stands at $2025 while if he availed of a jumbo loan for the same term at 8% interest it would be $2467 for the amount. Thus you save $159,120 over the period of 30 years by opting for the former.
The modes of choosing the two liens could be any one of the following:
- Two fixed rates
- Two adjustable rates
- One fixed and another adjusted
- One fixed and another with variable rate with HELOC
The piggyback can help you:
- Build equity faster
- No escrow fee involved
- No need for PMI approval
You should keep in mind that both the liens must have same income documentation type. This was introduced in a market where rates were climbing. Those having even one lien with ARM will suffer the consequences of a volatile market. The other very important news which borrowers should look forward to is the passing of the bill involving tax deductibility for PMI.
If you only want to save on PMI piggyback mortgage is your best bet, but you must keep a check on the interest rates for ARMs. Always remember, the PMI is the lender's security device and you can get out of it after you have compensated to 20% of the equity.
Related Articles:
|
|
