Piggyback Loans

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‘Piggyback’ Loans Revisited
Source: The New York Times

“Piggyback loans” are readily available once again, but not in the form that allowed many borrowers to buy homes with no money down before the housing crash. These mortgages are essentially a two-loan package — one “piggybacks” on the other to go toward the purchase price.

Making Sense of the Story:

  • During the housing bubble, piggyback, or combination, loans were commonly available as what were known as 80/20s. A home buyer got a first mortgage for 80 percent of the purchase price, then a second, subordinate mortgage from the same or a different lender to count as a 20 percent down payment. This relieved the buyer of the cost of private mortgage insurance, which is generally required when borrowers are financing more than 80 percent of the home’s price.
  • After the housing bubble burst, and values plummeted, many piggyback borrowers found themselves with negative equity. And those who defaulted often had trouble obtaining a loan modification or approval of a short sale.
  • The piggyback loans now available are more difficult to qualify for and limited to 90 percent loan to value. In other words, the borrower must put up at least 10 percent. They are often marketed as 80/10/10s, with the last 10 representing the down payment.
  • Many of the programs are aimed at “jumbo” borrowers, who tend to have higher net worth. Jumbo, or nonconforming loans, are mortgages that exceed the loan limits set by Fannie Mae and Freddie Mac. (The 2015 single-family limit is $417,000 in most areas, and $625,500 in high-cost areas.)
  • According to some experts, jumbo borrowers may choose to add a second mortgage rather than roll all the debt into the first, because they can get a lower interest rate on the first if they finance 80 percent or less. While the rate on the second loan will be higher, they have the ability to pay it off over a relatively short period of time, leaving them with only the lower-priced loan.
  • Borrowers should not assume an 80/10/10 will be cheaper than a loan requiring mortgage insurance. They should consider paying the insurance upfront, by financing it into the rate, which can lower the monthly payment

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