Sometimes Two Loans Are Better Than One
Home buyers often want to avoid paying mortgage insurance. So do homeowners who are looking to refinance.
A popular mortgage structure that helps them do that is called a “piggyback loan” commonly known as an 80/10/10 mortgage.
With this strategy, you to open two mortgages simultaneously. The second mortgage “piggybacks” on top of the first.
This strategy eliminates private mortgage insurance (PMI) because it covers part of the 20% downpayment, if you’re a home buyer, or equity requirement if you are a refinancing homeowner.
Twenty percent is the industry-wide minimum below which lenders require PMI.
More home buyers and homeowners today are choosing piggyback loans, and more lenders are offering them.
These three strategies can help you buy or refinance a home more cheaply, and perhaps, more easily.
1. Avoid Mortgage Insurance With A Piggyback Loan
Mortgage insurance can be expensive.
The cost rises significantly with lower credit scores and small downpayments.
You can avoid MI, however, with a combination of loans: an 80 percent first mortgage and a second mortgage of five to fifteen percent. There are three major types of piggyback loans, as follows.
In all these examples, the first number represents the first, or main, mortgage. The second number is the second mortgage, which might be a line of credit or home equity loan.
The downpayment percentage is the final figure.
The next logical question is whether an “80-20” exists, in which the second mortgage covers the entire downpayment amount.
These are difficult or impossible to find in today’s market. They soared in popularity during the housing boom of the 2000s, but as values dropped thereafter, lenders stopped offering them.
The closest you can get – maybe – is the five-percent-down option. Fannie Mae and Freddie Mac allow a second mortgage of up to 17 percent. But they allow it, they don’t offer the second mortgage portion of the loan.
Typically, banks and credit unions offer second mortgages. It depends on that lender’s rules about how much financing they will approve. It’s possible they only offer a ten percent mortgage to piggyback on top of your other financing.
Ask your primary mortgage lender if they offer secondary financing, or if they know anyone who does. Lately, more banks are opening up piggyback options.
Piggyback loan savings example
Assuming you can secure second mortgage, here is an example of potential savings.
You have ten percent down on a $200,000 purchase, and a 679 FICO. Based on PMI rates from a national mortgage insurance company, the following is your payment with a 4.0 percent mortgage rate.
- Mortgage payment: $859
- Mortgage insurance: $150
- Total: $1,009
A piggyback loan with a home equity rate of 5.0 percent might look something like this:
- First mortgage payment: $763
- Second mortgage payment: $107
- Total: $870
The potential PMI savings attract home buyers to this home loan strategy. But avoiding mortgage insurance is not the only reason to use a piggyback loan.
You can also cut your jumbo loan down to standard loan limits to lower your rate, and qualifying hurdles.
2. Convert A Jumbo Loan Into A “Conforming” One
Jumbo mortgages are those that exceed the “conforming” loan limit for Fannie Mae and Freddie Mac home loans.
The nationwide conforming limit is $, but up to $ in some higher priced areas of the country.
Once you exceed your local loan limits, financing can become more challenging. Fewer lenders offer above-market loan amounts, and rates can be higher.
Qualifying can also be more difficult.
If your loan amount just misses the conforming limit, explore a purchase money second for the excess.
Here’s how that works. Say you need a loan amount greater than $.
You take out a loan at the local limit, and fill in the gap with a second mortgage worth the difference.
You may end up with a lower payment and quicker turnaround.
3. Skip Cash-Out Refinance Surcharges
Most mortgage lenders consider cash-out refinancing a lot riskier than “regular” rate-and-term refinancing, and they raise rates accordingly.
For instance, Fannie Mae’s Loan Level Pricing Adjustment matrix adds up to three percent of your loan amount in fees for certain cash-out loans.
These fees can either be paid in cash, financed into the new loan amount, or paid for via a higher interest rate.
You might end up with a rate 0.50% higher than a non-cash-out rate.
Here’s an example of how a second mortgage can save you money when you are tapping into your home equity to raise cash.
You’re refinancing a $300,000 mortgage and just want an extra $20,000 in cash for a total loan amount of $320,000. That $20,000 could cost you between $1,200 and $10,000 upfront or even more over the life of the loan, due to extra fees associated with cash-out financing.
Ask your lender about “rate-and-term” refinancing for the $300,000. This simply means you don’t want extra cash out.
Use a home equity loan or home equity line of credit (HELOC) for the $20,000.
In general, home equity loans are the cheaper option when the amount of cash you want is relatively small. For a larger cash out amount, taking out just one loan could be the better option. Check the cost of the second mortgage and its interest rate compared to getting one loan.
Sometimes, two loans are better than one. It’s important to recognize that possibility and ask lenders to provide both single and multi-loan scenarios in these cases so you can make an informed decision.
What Are Today’s Rates?
Mortgage rates for primary and secondary mortgages are extremely low, thanks to an overall consumer-friendly interest rate environment.
Get a rate quote for you home purchase or refinance. Quotes are available in minutes, and no social security number is required to get started.