Piggyback mortgages were quite popular before the year of 2007 as a tax deductible alternative for conventional PMI premiums. 2007 broke this subtle balance as Congress made PMI premiums tax deductible, too, but for that one year only. Being limited to certain restrictions and so far unpredictable future, PMI still leaves some room for the piggyback to kick and prove its worth.
First, let me explain how the Piggyback Mortgage option works. If a homebuyer needs to borrow more then 80% of the property’s purchase price, he either goes for one conventional mortgage and pays Private Mortgage Insurance (PMI) premiums, or tries to avoid it by opting for either Lender-Paid Mortgage Insurance (LPMI) or a Piggyback Mortgage, also known as 80/20. Actually, “80/20″ explains a lot by itself: the mortgage is, in fact, a combination of a primary mortgage for 80% of the purchase price and a secondary mortgage for an amount required to fill up after the down payment. The more comprehensive names for this mortgage sometimes are 80/10/10, or 80/15/5, or 80/5/15, indicating the details of the secondary mortgage – 10% borrowed/10% own down payment, 15% borrowed/5% own down payment, 5% borrowed/15% own down payment, respectively.
If both the primary and the secondary mortgages are provided by the same lender, the 80/20 is usually treated as one combined mortgage, which means closing costs for one. If the primary and the secondary mortgages come from different lenders, closing costs are to be paid to each of them, which shrinks the prospect saving a lot.
The 80% primary loan requires no insurance and can be a fixed rate or an adjustable rate mortgage with any options you will find appropriate. The secondary mortgage is also pretty much a free choice, but you have to be prepared that the interest rate on this one will be considerably higher. This mortgage comes second in the refund queue in case the borrower defaults, i.e. is considered to be riskier for the lender, and lenders are usually not shy to charge for whatever risk they claim they may be running.
Depending on the amount of the secondary loan and your financial potential, you may want to have the term of the secondary loan shorter than that of the primary loan. The shorter the term – the higher the monthly payments – the sooner the mortgage amortizes – the smaller the overall amount paid as interest on the loan. Or at least some occasional extra payments can help you get it off your back sooner.
Another way to free yourself from this combined mortgage when the time comes is refinancing when the total balance of the 80/20 combination hits the 80% mark. Refinancing, however, always involves new closing costs and other payments that may turn the whole idea into a bad choice. Not inevitably, though. Every case and situation is unique; the calculations and comparisons should be built on honest and true information about the property, your income and the mortgage details.
It is also true, that Piggyback is not always the best choice against PMI. The two most influential, in my opinion, factors are: the pace of the property appreciation (or depreciation), and the period you are going to actually own the property. If your property appreciates at a considerable pace, it may allow you to get rid of PMI sooner, even though the procedure is not cheap or easy. The property appreciation, however, has no effect on a piggyback mortgage – it has to be paid off according to the conditions agreed upon at closing. Nevertheless, even in this case you may still be better off with a piggyback loan, so always pre-calculate and estimate and compare before making your choice. There are special sites that provide information on current property values in different regions. Check on the area you find attractive, preferably do it periodically during a considerable period of time, to build an idea of the dynamics of real estate prices there.
Piggyback mortgage monthly payments are usually lower compared to a conventional mortgage with PMI. If you are not going to live in the property for a long time, piggyback may be a more sensible option for you, as the monthly payments will not be too heavy on your budget; but a long term ownership will mean that you will have to pay actually two mortgages for a very long period of time. But for the financial inconvenience, it makes it almost impossible for you to qualify for another loan, should you happen to need one. PMI, on the other hand, gets to be cancelled at a certain point, and it always is just one loan anyway.
Now, the last, but not least. Piggyback mortgages, as well as Lender-Paid Mortgage Insurance Loans, require a good credit score to qualify.
