Piggyback Mortgages, commonly called “Combo” or “80-10-10 mortgages” are transactions where a second mortgage or home equity loan is taken out simultaneously to a first mortgage. Typically, real estate transactions include just one mortgage, but a piggyback mortgage includes two. Piggyback mortgages are often compatible with a new purchase or an existing refinance and can be used strategically to structure the transaction for a greater benefit to the home buyer. Keep in mind, however, that the 80-10-10 numbers aren’t necessarily fixed. You can get a 75-10-15 or several other combinations. By the numbers:
80: First Mortgage balance expressed as a percentage of the purchase price
10: Second Mortgage balance percentage
10: Your cash investment percentage
Piggyback mortgages are frequently used to lower the loan-to-value ratio (LTV) of a first position mortgage to 80% or under, thereby eliminating the need for private mortgage insurance (PMI) but there are several considerations you should be aware of. Your Mortgage Loan Originator can help you find the best options! Here are just some of the possible benefits of a piggyback mortgage:
1) Eliminate Private Mortgage Insurance (PMI)! Here’s how: If you are purchasing a property for $180,000 and would like to put 10% down, you can structure it this way:
- $144,000 First Mortgage
- $ 18,000 Second Mortgage
Your Total financing: $162,000 (90% of the purchase price)
Added benefit: You now have the option to waive real estate tax and/or home owners insurance!
2) Reduce your housing payment with a lump sum. Here’s how: In the example above, you would have two mortgage payments, a payment for the first mortgage and one for the second. If you paid off your second mortgage you would be left with just the first. You just lowered your housing payment! This cannot be done with a traditional fixed rate mortgage where your payments to principal & interest remain constant even though you pay extra to your principal monthly or in a lump sum.
Added Benefit: Often your mortgage payments with both the first and second can be lower than a mortgage WITH PMI monthly. Ask us to compare!
3) Increase your tax deduction. Here’s how: In a traditional mortgage that contains Private Mortgage Insurance, you are required to follow the IRS rules for the PMI’s tax deductibility. These rules are complex but include provisions for you to occupy the home and adjusted gross income maximums. The U.S. Congress considers these rules and the deductibility annually. With a piggyback mortgage you will have interest on both the first and second mortgage and at least historically, these rules have not changed much. For more information on this topic, click Here.
4) Avoid higher rates and “Jumbo” loan programs. Here’s how: The Federal National Mortgage Association (FannieMae) and its little brother FreddieMac, are the primary service enterprises that purchase mortgages from lenders like Family First FCU. Both of these entities have a maximum mortgage limit for a single family home of $417,000. If you exceed that amount, you will typically be offered a ‘Jumbo” loan with a higher rate or fees. If you wish to purchase a home for $500,000 and want to avoid a Jumbo loan, put down 10% ($50,000), and break the remaining $450,000 into two loans: $400,000 for the first mortgage and $50,000 for the second mortgage, taking advantage of the better terms on the first.
Added benefit: No PMI, optional escrows and the ability to pay off the second with a direct impact on your housing payment.
Piggyback loans are not for every situation or for every homebuyer, but they are a strategy that Family First FCU wants you to be aware of. We can give you’re an estimate of a loan with PMI or a blended interest rate for a piggyback transaction. Ask our Mortgage Loan Originators to review these options with you.