Should You Apply for a Piggyback Loan?

Piggyback Loan is a term used in home financing and mortgages. It's a financing option that allows the borrower to purchase property using two different lenders.

When applying for a piggyback loan the lender usually offers three different options: the 80-20 loan, the 80-15-5 loan and the 80-10-10 loan. All three financing options allow you to finance 80% of the home's purchase price through the first lender and a portion or the rest through a second lender. With the 80-20 loan the remaining 20% of the purchase price is financed through the second lender. The 80-15-5 loan allows the buyer to pay down 5% of the loan and the second lender will finance the remaining 15%. Finally the 80-10-10 loan allows the buyer to pay down 10% of the loan and the second lender will finance the remaining 10%. Pros of a Piggyback loan

There are three major pros of choosing a piggyback loan: The ability to purchase more home, easier to get approved financing with little or no money down, and avoid PMI or private mortgage insurance.

First, a piggyback loan allows home buyers the ability to qualify for a more expensive home. A piggyback loan lowers the risk to both lenders because one financing company is not responsible for the entire loan amount. Both lending companies are willing to loan more money if another lender shares the risk of the loan.

Second, a piggyback loan allows home buyers a better chance of getting approved for a mortgage with no money down. This is especially a great option for first time home buyers. Years ago banks and mortgage companies would not allow you to purchase a home unless you had a down payment of at least 20% of the purchase price. Loan programs such as piggyback loans have allowed thousands of people to purchase homes that would normally be out of luck.

Finally, a piggyback loan allows the home buyer to purchase a home without paying PMI or private mortgage insurance. PMI is basically an insurance policy for the lender in case the borrower defaults on the loan. The lender however makes the borrower pay for this insurance policy either up front or as a monthly payment. Most lenders require PMI unless the home buyer has at least 20% equity in the home. Since a piggyback loan takes care of the 20% equity through another lender the first lender doesn't require the purchase of PMI. Cons of a Piggyback loan

There are some cons of choosing a piggyback loan: Higher interest rates, fees or large balloon payments, restrictions on home equity loans, and no way to drop your payment by getting rid of PMI.

First, a piggyback loan always carries a higher interest rate than a standard fixed rater mortgage. The lenders are assuming a little more risk therefore they charge higher interest rates. Sometimes the lender of the 80% will offer very competitive rates, however the second lender will often have an interest rate 3% - 4% higher than the first loan. For the first mortgage may carry an interest rate of 6.25% and the second mortgage may have an interest rate of 8.5%. Even with the higher interest rates your payments will still be somewhat lower than a traditional fixed rate mortgage with PMI.

Second, it's not uncommon for the second loan to be a balloon loan. This type of loan carries a much better interest rate for a period of time but you will have to pay the balance in full at the end of the balloon term. Also, watch out for fees that are associated with piggyback loans (read the fine print).

Third, you may be restricted on getting a home equity loan on your home. Even though you may have equity in your home it might be tricky to get a home equity loan or a home equity line of credit. Since you essentially already have a second mortgage on your home lenders will think twice about loaning you more money.

Finally, with a traditional fixed rate mortgage with PMI you can actually drop the PMI insurance when you have 20% equity in the home. This might only take a few years if you had a good down payment or the value of your home increases. With the piggyback loan you are stuck with the higher interest rate second loan until it is paid in full. Conclusion Before deciding on which type of loan is right for you consider several factors. Know exactly how much money you have available for a down payment. Think about how long you plan to stay in your new home. Understand every aspect of your budget and know how much home you can actually afford. Always consider other expenses of buying a home such as taxes, insurance, and closing costs. Also plan on spending extra money for home furnishings, decorations, and appliances. Knowing which type of loan is right for you is very important before you sign on the line!