June 8th, 2016 5:13 AM by Jackie A. Graves, President
You don’t really have to put 20% down on a house (and
prices so high these
days, who can afford that?), but if you don’t, you have to pay for private
mortgage insurance, which can be a costly add-on to your monthly bill. So one
way or another, you’ll pay.
there’s a kind of loan you can use to avoid PMI—and save money at the same
time. You may not have even heard of it! It’s the 80-10-10 mortgage, commonly
referred to as a kind of piggyback mortgage.
in fact, two loans that cover most of your
mortgage while you only put 10% down. The first mortgage covers 80% of the
home’s value, 10% is what you put down, and the second loan is for 10%. The
second loan (the piggyback) is taken out as a home equity line of credit
(HELOC) that closes at the same time as your 80% mortgage.
effectively have a mortgage with only 10% equity, but you don’t pay PMI (versus
getting a loan for 90% of the home’s value with a 10% down payment and paying
that’s the point of a piggyback mortgage—to avoid PMI when you don’t have
enough to put 20% down. But it’s not the only reason; some people use
piggybacks to pay for a home a conventional mortgage wouldn’t cover,
essentially avoiding jumbo loans.
first, let’s talk about PMI.
the market crash, piggyback mortgages were very common. That’s mostly because
PMI was more expensive than it is now, potentially running to several thousand
dollars a year.
past, PMI was a dirty word,” explains Jeremy Schachter, a mortgage adviser and
branch manager with Pinnacle Capital Mortgage in Phoenix, AZ. Now? Not so much.
rates vary just like mortgage rates, with higher rates for low credit
scores and tight debt-to-income ratios. Generally, you can expect to pay $30 to
$70 per month for every $100,000 borrowed, according to Freddie
Mac. (Keep in mind that’s just an average—you could end up
paying more, depending on your personal situation.)
you’d still rather avoid that PMI, the piggyback mortgage could be a good
option for you.
upfront costs of the piggyback mortgage itself—the HELOC—are also pretty cheap.
closing costs are usually
inexpensive, because it’s a revolving line of credit,” says Cary Carbonaro, a
certified financial planner and author. The real cost is weighed in both the
money paid on interest and in the risk of having a second loan secured by your
eligibility requirements for a piggyback are tight. Generally they’re for
“someone who has amazing credit, or a ton of assets, or both. I don’t see an
average person getting this,” Carbonaro says.
agrees. “Second mortgages are in second lien position, meaning they get paid
after the first mortgage. Second mortgages have stricter guidelines on credit,
your debt-to-income ratio, and past credit issues like foreclosure, bankruptcy,
and short sales,” he says.
In fact, a credit score of at
least 700 is
required—higher scores are commonplace.
HELOCs actually come with higher interest rates than primary mortgages. In
addition, they’re usually adjustable-rate mortgages, which fluctuate according
to market rates, although some lenders offer hybrid or fixed-rate options. If
you get an ARM, don’t forget that the Fed is expected to gradually raise rates
over the next several years.
payment will go up on all [ARM] HELOCs,” says Rick Olson, a mortgage adviser with
Commerce Home Mortgage in San Ramon, CA.
while you won’t be wasting money on PMI, you’ll be paying off your HELOC
interest—which could easily be more than PMI payments.
would anyone with stupendous credit and/or great assets want an 80-10-10?
turns out, piggybacks aren’t just used to avoid PMI. They can be used to
leverage a conventional loan into a mortgage a nonconforming jumbo loan would
normally require. So if you want a home that’s more than your county’s
conforming loan limit—usually $417,000—you can “piggyback” some cash
by taking out a HELOC. That money, combined with your down payment, can net you
a house significantly more expensive than the conforming loan limit, while
using a conventional loan and putting only 10% down.
makes sense because jumbo loans have higher interest rates, so you’re
essentially “getting a better rate on the first mortgage,” Schachter says.
piggyback mortgages might not be worth it, both Schachter and Olson agree. The
cost of PMI is so cheap these days, you could be spending more on your
fact, Schachter says he has “not seen a big comeback [for piggybacks] since the
first financial crisis.” Olson says he hasn’t worked with an 80-10-10 in “at
least a year” and that piggybacks saw a slight resurgence “for a bit [after the
financial crisis] but not anymore” since PMI rates are so low.
would compare doing one loan with mortgage insurance and then compare with a
piggyback,” Schachter says. “Many times I see it makes more sense to do the one
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