Piggyback Mortgage FAQs
Q: What Is A Piggyback Mortgage?
A: When a borrower takes out two separate mortgages as a
package, with the first mortgage covering 80% of their needs and the second
one for the 10, 15 or 20% remaining, that is a piggyback mortgage. Simply,
one loan is riding on top of the other one. The second mortgage is either
an FRM or ARM. The percentage of the piggyback is relative to how much
equity is applicable if it is a refinancing, or how much of a down payment
is being made if it is a new purchase.
Q: Why Do I Even Want To Consider A Piggyback Mortgage? Why Don't I Just Secure One Mortgage For 90%, 95% Or Even 100% Of The Value Of The Property?
A: If a the lender must accept more risk than 5% or 10%, you'll pay higher rates, higher fees, or both as a "risk premium." Before the advent of piggyback loans, lenders were not to keen on granting loans in excess of an 80:20 Loan-to-Value ratio. They could not be easily sold to the secondary market, which ostensibly means the lender will have to keep your loan, and all of the risk of delinquency or default, for its entire term.
Experience had shown the lenders that people with less of a risk assumed on their part were not as responsible and not as apt to stick it out if they ran into financial or employment difficulties. If the lender had assumed most of the risk he was often times left holding the loan while the borrower shirked their responsibilities and disappeared.
These days mortgage insurance helps to protect the lenders and investors by
covering a portion of the value of the property. Then if the borrower
is forced to default, the mortgage insurance will usually cover the costs
of foreclosing on, and restoring the property to a sellable condition if
needed, as well as covering the costs for selling it.
Mortgage insurance not only protects the lender who controls the loan it makes it less difficult to sell the loan to prospective investors. In turn it will also raise the cost of the loan because the mortgage insurance premiums are added to the loan payments.
Mortgage insurance premiums are not tax deductible in the same manner that interest payments are. Plus, the less of a down payment that is offered the higher the mortgage insurance payments will be. This is why the piggyback arrangement was introduced, to assist borrowers with only small down payments and to help them avoid having to pay additional premiums for mortgage insurance. The piggyback then allows the borrower to exchange the insurance payments for tax-deductible interest payments.
Lenders benefit from this technique, too. Due to the first mortgage being made at an 80% LTV level, it can now be sold to a secondary market loan buyer like Freddie Mac or Fannie Mae. The second lien can then be either held in portfolio, or sold. The second lien usually has a much lower risk factor associated with it and the lender then has a higher profitability margin.
Q: Aside From Getting Out From Under Mortgage Insurance, Are Piggybacks Used For Other Purposes?
A: Yes, borrowers who want to sidestep higher loan amounts,
and therefore higher interest rates, of the jumbo mortgages employ piggyback
mortgage packages. A first mortgage for an amount at or near the conforming
limit, which is currently $333,700, is taken and the balance needed is
assigned to a second mortgage. So a smart tactic to employ to lower the
amount of interest paid on what could have been a jumbo loan of, lets
say $375,000 dollars, is divided into a first mortgage for $330,000 and
a piggyback second mortgage of $45,000. The borrower is now able to forgo
the jumbo's higher rates that have a 1/8 to 1% premium tacked onto the
mortgage's overall price. The investor is also able to pay a lower rate
for the bulk of the amount needed and a relatively small part is assigned
the higher interest rate.
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