The use of a piggy back mortgage is rising in popularity according to a Wall Street Journal/Harris Research poll released last week. It is a fairly smart move if you are financing a high percentage of a homes worth to avoid the dreaded PMI, or private mortgage insurance. For those who do not know how it works, you take out an 80 percent first mortgage and then a secondary loan to cover the remaider of the debt.
Most people taking out this piggyback loan are doing so to avoid the PMI and firmly plan to refinance when the home crosses the magical 80 percent line of value to loan ratio. But what happens when housing prices stagnate? Would you get into one of these loans today? A rise from 10 percent to 12 percent are according to this recent poll, and I am not sure that the level of optimism be this high.
Piggyback mortgages, which stack a smaller home-equity loan or line of credit on top of a primary mortgage, became popular in the late 1990s. These mortgages were the first in a “creative financing” wave that made homes more affordable for homebuyers and helped to fuel the recent boom in the housing market. A piggyback loan is commonly designed as a primary mortgage that covers 80% of the home’s cost, paired with a second loan that usually covers 10% to 20% of the remaining cost. (Anything left over is accounted for by the down payment.) Lenders have gotten much more creative with financing options so there are many varieties of piggybacks — such as 75%/15%/10%, for instance.
The number of homeowners who use piggyback loans to buy their homes is growing: A Wall Street Journal Online/Harris Interactive poll found that 12% of homeowners had piggyback mortgages, up from 10% last year. Why divide up a loan in this way? To help homebuyers avoid paying private mortgage insurance, the pricey coverage lenders demand when homeowners need to borrow more than 80% of the value of a home with a primary mortgage. Typically, PMI costs 0.5% of the loan amount, or roughly $108 a month on a $250,000 mortgage. With a piggyback mortgage, a homeowner isn’t borrowing enough with one single loan to trigger the need for PMI via the Real Estate Journal
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{ 3 comments… read them below or add one }
Are these loans the culprit for many foreclosures? For example, someone buys a home using loans like these. A few years down the road real estate prices go backwards. The owner gets laid off. He can’t sell the house for what he needs to pay off the notes. The result? Unless he knows about short sales and hires a good agent to assist him – and if the bank cooperates – he may face foreclosure. I don’t mean to be all doom and gloom here. These programs work great for many people. I think people just need to be informed.
Sam,
I think that it is a big part of it. If you do not have much wiggle room, Murphy is there with his laws to pick up the slack.
T
Piggy back mortgages (we call them “2nd trusts” around here) are very common in this area. With the prices of homes being so high in this area, coming up with 20% for a down payment is tough. You could buy you a home outright in other parts of the US with that amount of money!
The problem is that they are at a higher rate and almost always variable. They can adjust up to monthly and unless you have a cap, you could be paying double to triple the amount or more if the rates increase.
It’s a gamble, but one most people are willing to take in order to afford a house around here.