Homebuyers today are getting creative when it comes to how they finance their homes – and how they save money. Not all mortgages are created equal, and some financing options could cost you more in the long run than others. A popular financing option many buyers are turning to is the piggyback mortgage, which involves taking out two separate loans to finance the purchase of a house. If you’re new to the home buying scene, this term might be Greek to you, but today we’ll explain what a piggyback mortgage is, how it might benefit you and what disadvantages it might present. This way, you can make an educated decision about how you finance your home purchase.
What is a piggyback mortgage? – A piggyback mortgage is essentially what it sounds like – one loan riding on top of another. Instead of taking out one loan to cover the entire cost of purchasing a home, a borrower takes out a loan that covers 80% of the home’s value and a separate loan that covers 10% of the home’s value. Typically, the borrower pays the remaining 10% as a down payment on the house. For this reason, a traditional piggyback mortgage is also known as an 80-10-10 loan.
How will I benefit? – Piggybacking a mortgage can be a great way to save money when you’re purchasing a home, because you won’t have to carry a private mortgage insurance (PMI) plan. PMI really doesn’t benefit homeowners, so it’s an unnecessary expense many owners would rather avoid. A PMI is often required if you don’t have a 20% down payment on hand, but when you piggyback a mortgage, you don’t need to spend that much upfront. Typically, only a 10% down payment is involved in this financing method. You may also qualify to buy a larger home using this method, acquire a lower monthly payment, and the interest on your second mortgage is tax-deductible up to $100,000.
Are there any downsides? – While there are certainly some excellent benefits to piggybacking a mortgage, there are also some disadvantages. You might have a higher interest rate on your two loans when using this financing method. You’ll also have to pay closing costs on two mortgages instead of one. Additionally, you might not get the full tax benefits if your second mortgage is over $100,000.
How do I qualify? – In order to qualify for two loans, your credit needs to be in top shape. The application process is the same traditional mortgages, except you’ll apply for two loans instead of one.
How do I decide? – If you can afford a 20% down payment, a traditional single mortgage will likely be much more beneficial to you than taking out two loans. You’ll have to pay PMI until the loan reaches 80% of your home’s value, but then this payment will cease. If you can’t afford a 20% down payment but 10% is easily attainable, a piggybacked mortgage is much more likely to benefit you in the long run.
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