This is a common scenario in today’s bustling housing market: you’ve found your dream home, but it will maximize your budget.
And when it comes time to get mortgage financing, you find you don’t have the money to make a down payment of at least 20% of the purchase price of your home. This means that you can be forced to pay for so-called private mortgage insurance, which will protect your lender in the event of a default on the loan.
You “may” be forced to pay for it, not “will” – because there is a workaround, another option that can allow you to buy a home and take advantage of the benefits of today. seductively low mortgage rates without paying 20% in cash before closing. This is called a complementary mortgage.
What is a piggyback mortgage?
When using a supplemental loan, you take out two mortgage loans instead of one. Typically, the first loan is 80% of the purchase price of the home and the second is 10%. The remaining 10% is what you need to deposit as a down payment.
The second loan is “combined” with the first and avoids private mortgage insurancecommonly known as PMI.
For example, let’s say you are targeting a $ 350,000 home. The down payment of 20% – enough not to show the PMI – would be $ 70,000. It would be difficult to come up with so much money if your savings are meager and you do not have rich parents to spend this money on you.
Here’s how an extra loan comes to your rescue: You take out your first mortgage for $ 280,000, or 80% of the purchase price. Then you take out a second loan of $ 35,000, which is another 10%. The remaining 10% – another $ 35,000 – is what you put in as a down payment.
This is a much more palatable amount than $ 70,000.
While this type of funding can help, if you don’t have a ton of cash in the bank, you need to understand both the pros and cons.
First, the benefits of a piggyback loan.
Housing prices have skyrocketed recently, making the 20% down payment unaffordable for an increasing number of potential home buyers.
The average sale price of a former home in the United States in April was a record $ 341,600, up 19.1% from a year earlier. National Association of Realtors… The median price is right in the middle, with half of the homes selling for less and half for over $ 341,600.
Again, the most obvious benefit of a piggyback loan, also known as an 80-10-10 loan, is that you can make a down payment of less than 20% of the purchase price of a home, getting rid of the PMI, which can be costly.
Premiums will vary depending on the size of your mortgage and the strength of your credit rating, but research from the Urban Institute shows that you will typically pay between 0.58% and 1.86% of the loan amount per year. This means that on a $ 300,000 mortgage, PMI can be worth up to $ 5,580 per year.
Another advantage of the 80-10-10 loan is that it can help you avoid getting a large loan if you buy a house at a higher price. Large mortgages exceed the limits set by government-funded mortgage companies Fannie Mae and Freddie Mac and may carry higher interest rates.
When you use a supplemental loan structure, the second loan is usually a home equity secured loan or home equity line of credit (HELOC), according to the Bureau of Consumer Financial Protection. The HELOC interest rate is usually closely related to base rate…
And the disadvantages of a piggyback loan
Before using a piggyback loan to finance your home, be sure to calculate all the numbers. Since you are taking out two mortgage loans, you may have to pay two sets of closing costs, which are usually up to 5% of the amount of each loan.
Plus, the second mortgage is likely to have a higher interest rate.
The rates on real estate loans and lines of credit are tighter than the rates on regular 30-year fixed-rate mortgages, which Freddie Mac says currently average just 2.95%.
And if you ever decide refinance your main loan at some point, you may have to pay off a secondary, additional loan first.
How to prepare your finances for qualifications
To qualify for an additional loan, you need to make sure that your finances are in good shape.
You may be able to get your first loan with a credit score of only 620, but equity lenders often require higher scores. If you’re not sure if your credit is good enough, it’s easy these days check your credit score for free…
The lender will also keep a close eye on how much debt you already have and probably won’t feel very confident if you are saddled with a lot of high interest debt. You can combine your balances into a single one, low interest debt consolidation loan…
Whether you are looking for an additional loan or a more traditional scheme, one of the best ways to get an interest rate that suits your budget is: consideration of several loan offers side by side… Research by Freddie Mac and others has shown you will save thousands over the long term by comparing the rates of at least five lenders.