Is It Important To Compare Mortgage Rates
Comparing mortgage rates is one way to save money on your home loan. If you accept the first offer you see, you may regret it later. With so much competition in the lending industry today, you can usually find a lower rate if you do a little price comparison.
The easiest way to find low rates is to shop around. This is really easy in todays internet-driven world. There are loan calculators, comparison tools, lender portals, and more all designed to help you line up offers to see which is giving you the right deal.
What Are The Drawbacks Of Getting A Piggyback Mortgage
While piggyback mortgages are once again gaining popularity, they are by no means easy to get. You’ll likely need a credit score in the very good or exceptional FICO ranges to qualify.
In addition, you’ll have to apply and qualify for both loans separately. .
A separate closing will be required for each loan, with all the expenses that entails, potentially including origination fees and the costs of home appraisals, legal fees and so on. It’s important to map out the total costs of both loans when determining whether a piggyback loan saves you money compared with a jumbo loan or a traditional mortgage that requires PMI.
If your circumstances change and you can’t pay back the secondary loan as quickly as you’d hoped, you may end up spending more over time on a piggyback loan than you would on a traditional mortgage plus PMI. And if you’re unable to keep up with the payments on either loan, you could lose the house, since both lenders can claim the property as collateral against what you owe them.
If you decide to refinance the house at some point in the future, having two loans on the property could complicate your ability to qualify for a new loan. You may have to pay off the secondary loan in full before you can arrange refinancing.
How To Choose The Right Home Equity Lender
Your first step in deciding which home equity lender to go with is to figure out what you need. What is the amount of money you need to take out, what are the average interest rates given by the company, and will you be able to make the payments in time, month after month?
Look at the credit score requirements of the company and see how you match up. If your credit isnt high enough you might not get approved at all, or only for a loan with terms that arent so friendly.
Its helpful to find a company that has an easy application process and which will provide you with personalized customer service throughout the process. Ideally the company will also send you multiple loan offers with different terms, so you can decide the one thats right for you.
In addition, not all lenders charge fees for the loan. You can easily find ones that dont charge an application fee or origination fee, and dont charge you any sort of closing costs. While these fees arent as big a burden as the loan itself, they can still take a bite, so shop wisely and you should be able to find a company with no fees.
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Piggyback Mortgage Or Private Mortgage Insurance
A piggyback mortgage makes sense in cases where youll be borrowing a substantial amount of money, such as with a jumbo loan. Sometimes, jumbo loan borrowers will get another mortgage because they can take advantage of the lower interest rate on their first loan. They can then pay off the second loan faster and save money over time on interest payment. Plus, you can deduct the interest you pay on both loans from your taxes. Just keep in mind that theres a limit on the second amount, up to the first $100,000. Still, any savings is better than none!
The Pros And Cons Of Piggyback Mortgages
For many borrowers, the main benefit of getting a piggyback mortgage is the ability to avoid paying PMI by ensuring they can reach the 20% down payment threshold. However, its also a plausible solution for bypassing jumbo loans, potentially leading to lower interest rates and better terms.
When it comes to drawbacks, the main one is the qualification process. Typically, you need very good or exceptional credit and a low debt-to-income ratio to secure an approval. Additionally, you have to navigate two loan applications simultaneously while also juggling the home-purchase process, which is cumbersome.
In some cases, your options for the piggyback loan can be a bit limited. Not all lenders are as open to issuing this type of financing. At times, you may be able to get recommendations from your primary lender, though you may also have to research them on your own.
Securing two loans also means covering some extra costs. You may have double the origination fees, appraisal costs, inspection fees and other expenses, depending on the piggyback loan and primary mortgage involved. Also, depending on the size and terms of the piggyback loan, these costs could be higher than paying PMI would be.
If you fall behind on either mortgage, your home is at risk. Its serving as collateral on both loans, so defaulting on just one of the loans could trigger foreclosure. Finally, your refinancing options may be limited while the piggyback mortgage is active.
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A Piggyback Mortgage Could Save You Pmi
by Christy Bieber |Updated July 19, 2021 – First published on Jan. 11, 2021
Image source: Getty Images
Consider the pros and cons of a piggyback mortgage.
Most home buyers take out just one mortgage loan. But some people get a piggyback mortgage.
A piggyback mortgage actually happens when you get two separate loans. One of them is your primary mortgage loan. And the other is also a secured mortgage loan that you get instead of making a larger down payment.
There are pros and cons to a piggyback mortgage. But if you can’t pay a traditional 20% down payment, securing one is definitely worth considering. Here’s what you need to know about how this loan type works, as well as some advantages and disadvantages to think about.
Some Things To Consider
The way to best utilize a piggyback mortgage is to pay off the second loan as quickly as possible. Then you are left with just a traditional mortgage at a good interest rate to pay off. If you do not work quickly to payoff your piggyback loan, the interest rate on the small loan could rise and could cost you more money.
Plus there are sometimes more closing costs involved with a piggyback mortgage as the lender has to do the work to underwrite two loans instead of one.
And if you ever decide to refinance you may have a tricky time. You may be required to pay off the second loan before you can refinance.
Once you understand how to make a piggyback mortgage work for you, it can be a useful tool on your journey to homeownership.
If you have questions or think that a Piggyback Mortgage might work for you or someone that you know – give F.T. Financial, Inc a call today at 480-970-9499 and mention that you’re interested in a Piggyback Mortgage loan.
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Figure : Flight To Quality Rising Jumbo Share And Declining Fha Share Amid Piggyback Lending Contraction
Entering 2020 and just before the pandemic, piggybacked FHA loans accounted for about 53% of all piggybacked purchase mortgages. In June 2022, the FHA share is down to 42.5%. The share of piggybacked conventional loans declined slightly early in the pandemic, from 43% in January 2020 to 40% in January 2021, but has since redounded. In June 2022, the conventional share was about 49.6%.
While lenders tightened credit standards in response to the pandemic, the loan-to-value ratio of the piggyback loan amount as a percentage of a homes sale price indicates that credit availability to those who were approved the loans was not at all inhibited. Figure 4 provides the piggyback loan-to-value ratio for each loan type. Through the pandemic, the piggyback loan-to-value ratio has remained either unchanged at times or increased. As of June 2022, median conventional piggyback loan-to-value ratio has risen to 9.8% and jumbo to 13.1% before the pandemic, median piggyback loan-to value ratio was slightly above 6% for conventional loans and 12.5% for jumbo loans. The FHA piggyback loan-to-value ratio remains largely unaffected at about 4%.
How Piggybacking Can Avoid Jumbo Loans
By definition, a conforming loan follows guidelines set by Fannie Mae and Freddie Mac. Conforming loans must be within local loan limits set by these agencies each year. For example, in 2022, the conforming loan limit for most of the U.S. is $.
A mortgage that exceeds this maximum loan size wont qualify for a conforming mortgage. The buyer would need a jumbo loan instead. Jumbo loans often cost more and often have stricter qualifying rules.
In some cases, making a larger down payment can push a loan back within conforming loan limits. If you dont have the upfront cash for a larger down payment, a piggyback mortgage could be the answer.
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The Piggyback Jumbo Mortgage
Need a jumbo mortgage but you don’t want to pay a jumbo mortgage rate? You might consider a piggyback loan.
A piggyback loan is an arrangement where you use two mortgages, instead of just one, to finance the purchase of a home. The second, smaller mortgage is said to “piggyback” on top of the primary loan.
With a jumbo piggyback loan, you can take out a low-interest conforming mortgage for part of the loan, then a second piggyback loan for the remainder. In some cases, it may also enable you to avoid paying for private mortgage insurance as well.
Piggyback mortgages, sometimes called blended mortgages, are much less common than they were a few years ago, when they were a popular type of home financing during the boom years of the last decade. But they still can be a very practical way to save money when buying a home.
Piggyback Lending Shrinks During The Pandemic Housing Boom
Signs of lenders tightening credit standards and flight to quality in a time of uncertainty
At a time when record-low interest rates prompted home-buying frenzies, surging property values and mortgage lending, piggyback financing once a popular means of homeownership financing back in the last housing boom has missed out in the current pandemic housing boom.
A piggyback loan is incurred when a homebuyer takes out a second mortgage concurrently with the first mortgage on the property. For a prospective borrower making less than 20% down payment, the borrower may find it less expensive to take out a piggyback loan to cover any shortfall in down payment than paying primate mortgage insurance . A loan typically structured as down payment towards the home thus allowing homebuyers to borrow a higher percentage of the homes value piggybacks can be particularly helpful to buyers who have no or limited savings.
At the height of the pandemic housing boom, piggyback lending contracted and treaded mostly in the negative growth territory.
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Components Of A Piggyback Loan
The first part of a piggyback loan your 80% conventional loan works like any other primary mortgage. It covers the majority of the homes purchase price and youd qualify based on your credit score, debt-to-income ratio, and income. Most buyers get a 30-year, fixed-rate loan.
The second loan, which often covers 10% of the purchase price, is usually a home equity line of credit . A HELOC is a second mortgage, meaning its secured by your home equity and has its own monthly payment, separate from your first mortgage.
HELOC terms can vary. Most have variable interest rates, which means the loans rate and payment could change monthly. Interest-only HELOCs charge only interest during the first 10 years of the loan term, but those are best for temporary financing since they cost more in the long run.
Reasons To Get A Piggyback Loan
Savvy homebuyers are always looking for ways to save on their mortgage payments and piggyback loans may be a great way to do that. They also provide a short-term down payment solution if you dont have the cash to put down 20% on a new home, but know youll have the resources to pay off the second mortgage in the near future. Five reasons to get a piggyback loan include:
THINGS YOU SHOULD KNOW
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The Different Types Of Piggyback Loans And How They Work
The process of piggyback loans is easy to understand. The first thing you need to know is that with piggyback loans, youre financing 90% of the whole property instead of 80%. Assuming you have only $20,000 saved and the property you need to buy is valued at $200,000. So, you get a mortgage loan for $160,000 . After that, you approach another mortgage lender and take another loan out for $20,000 . So, the total value of mortgage loans accumulates to $180,000 , and your personal savings is only 10% of the total value.
Most of the time, your primary mortgage lender will guide you on who to approach if youre looking to get a piggyback loan. These smaller loans are mostly home equity loans that have a period of 10 years.
Qualifying For A Piggyback Mortgage
Its essential to keep in mind that youre applying for two mortgages simultaneously when you apply for a piggyback home loan. While every lender may have a different set of requirements to qualify, you usually need to meet the following criteria for approval:
Your debt-to-income ratio should not exceed 28%. Lenders look at your DTI ratio the total of your monthly debt payments divided by your gross monthly income to ensure you can make your mortgage payments. Therefore, both loan payments and all of your other debt payments shouldnt equal more than 28% of your income.
Your credit score should be close to excellent. Because you are taking out two separate loans, your risk of default increases. To account for this increase, lenders require a good credit score, usually over 680, to qualify. A higher credit score means youre more creditworthy and less likely to default on your payments.
Before you apply for a piggyback loan, make sure you understand all of the requirements to qualify.
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Different Types Of Piggyback Loans
- 80-10-10 loan. The 80-10-10 piggyback loan is a popular option because it allows conventional borrowers to avoid paying for PMI by making a 10% down payment, taking out a first mortgage for 80% and a second mortgage for another 10%. It can also be a good choice if you need to buy a home before your current home has sold.
- 80-15-5 mortgage. A variation of the option above, except it only requires a 5% down payment with a larger second mortgage piggyback balance.
- 75-15-5 loan. Condominium buyers may consider this option to avoid the higher markups for conventional loans with small down payments.
- 80/20 loan. These were popular during the years leading up to the housing boom and allowed for 100% financing of a home purchase. When the housing market crashed, many borrowers couldnt afford both payments and defaulted. This piggyback loan structure is not as common today but could return, according to the Consumer Financial Protection Bureau.
THINGS YOU SHOULD KNOW
Although the first mortgage cant typically exceed 80% on a piggyback loan, you can split up the loan-to-value ratio to fit your specific needs. Your LTV ratio is a measure of how much of your homes price is borrowed. For example, if you need to close on a new $300,000 home but encounter a delay in getting $120,000 worth of equity you expect to net from the sale of your current home, a piggyback loan may save the day. Assuming you plan to put 10% of your own money up, you could:
The Common Types Of Piggyback Mortgages
Generally, the most common types of financing used for a piggyback mortgage are home equity loans and home equity lines of credit . In both cases, the property youre purchasing serves as collateral. However, they do function a bit differently beyond that.
With a home equity loan, the financing works like a traditional mortgage. You borrow a set amount and repay it over a specific period. Once the repayment is complete, the loan is considered paid in full, and it closes.
HELOCs are a bit different. In this case, you also borrow a specific amount as part of your home purchase. However, as you repay that amount, you can potentially borrow it again. Its a revolving form of credit instead of a fixed-term loan.
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