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Are Piggies Still in The Market?

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Posted On: 11/25/2015

Question:

There used to be piggyback loans. Is such financing still available and, if so, is it safe for borrowers?

Answer:

In basic terms, a piggyback loan is a form of financing – really two loans – that are used to avoid private mortgage insurance.

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The way it usually works is that a borrower can buy with 10 percent down. That’s a solid down payment but less than the 20 percent lenders want up front before they will finance without PMI. So, instead of financing with 10 percent down and a mortgage equal to 90 percent of the purchase price or the appraised value, whichever is less, the borrower goes for a piggyback loan.

With piggyback financing – also called a “simultaneous second” – our borrower puts up 10 percent in cash, 80 percent in the form of a first loan and 10 percent with a second or junior lien. In this transaction we still have 90 percent financing, but because the first loan is only for 80 percent there is no PMI requirement.

Because there is no monthly cost for PMI, the total mortgage payment for both loans with piggyback financing can be lower and more affordable than 90/10 financing. That said, the PMI savings can be offset – and perhaps even eliminated – if the interest-rate cost for the second is higher than the first mortgage.

This brings us to an important point: If you’re considering a piggyback loan you have to compare it with 90/10 financing and look at the total monthly costs for each option. See which is best for you.

The second loan with a piggyback mortgage can be either a second loan or a home equity line of credit. It may be that the second loan has a term of less than 30 years and thus higher monthly payments. Or, conceivably, you could have a fixed-rate first loan and a second mortgage that is adjustable, meaning that monthly interest costs for the second loan could rise in the future.

In some case lenders will not allow an 80/10/10 piggyback arrangement and instead will want a deal with 75/15/10 financing, meaning the buyer must have 15 percent down. Speak with lenders about specific programs and shop around for the best deals.

You may want a piggyback loan if you feel that a substantial amount of cash is coming your way and intend to quickly pay off the second loan. Such a pay-off means the 80-percent first loan remains outstanding, but the second loan and its required monthly payment will be gone, so the borrower now has a lower total monthly housing cost in addition to no PMI.

Under the Dodd-Frank Wall Street Reform and Consumer Protect Act, lenders are entirely free to offer piggyback loans under the condition that the borrower is qualified for financing on the basis of the ability to repay both loans. This is an important protection for both borrowers and lenders because nobody wants to see more foreclosures.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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