Piggyback Mortgage FAQs

Q: What Is The Specific Structure Of A Piggyback Loan?

A: It used to be that a piggyback loan was comprised of a FRM first mortgage and a FRM second mortgage but these days there are other formulas employed. You may want to look into a package that includes a fixed-rate first mortgage and a variable-rate Home Equity Line Of Credit second mortgage. An ARM as a first mortgage with a FRM second is also a popular combination, and finally two ARMs together can also have benefit to particular investors.

In most of these scenarios the first, or primary mortgage, is for a term of either 15, 20 or 30 years and the second lien is amortized in 10, 15 or 20 year time frames. Balloon payments may also be a part of this type of investment strategy. If a balloon payment is a part of your package, be more than certain that when the time comes to repay that balloon, you are financially able to, or you could risk a foreclosure and loss of your hard earned investment.

Note: Always be certain that you understand all there is about piggyback loans, and there perceived advantages over the mortgage insurance, that would be required had you opted for not getting one in the first place

It is assumed that a piggyback loan can offer the advantages mentioned in lieu of paying for mortgage insurance, but that doesn't necessarily mean that the interest rate for the second portion will be competitively priced, even if it may ultimately work to the borrower's advantage.

These expected savings are produced on an after-tax basis, which is only available if your itemized expenses exceed the standard deduction which is available to you; that is, your total monthly or annual out-of-pocket cost may be identical to having a first mortgage with insurance, and the benefit of taking the piggyback may equal the tax deduction for the interest you pay on the second lien. If you don't or can't deduct the interest or you don't itemize, you are no better off than if you had taken the loan with the mortgage insurance tacked on.

Q: What About My Pre-paying The Second Lien Or Taking And Then Canceling Mortgage Insurance, Can This Be An Advantage?

A: What appealed to folks first about piggyback loans was that they would fully amortize and come to term with a definitive cost and at a specific time. One reason for this appeal is that in the beginning, before too much information about mortgage insurance was public knowledge, borrowers were unaware and were not told by the lenders that mortgage insurance plans of that time did not have an automatic cancellation mechanism as they do now. The borrower had to contact the lender and request that the insurance be dropped when it was no longer required because their mortgage's LTV went below the mandatory 80% mark. This meant that some folks unnecessarily paid their insurance premiums for years, at great expense. All of this changed in the later part of the 1990's when it became law under the Homeowner's Protection Act for an automatic cancellation of the mortgage insurance when the proper LTV levels were achieved.

Savvy investors then decided that one advantage of the piggyback loan market to then exploit was to prepay the second mortgage portion of their loan and save interest costs. However, this strategy only worked for people whose loan agreements were penalty free when it came to early repayment. Having a pre-payment penalty robs the borrower of some of the advantages he hoped to gain.

But, if your property appreciates at a good pace and you do have a mortgage insurance premium associated with it you should be able to get out from under the insurance requirements in about two years or so.

Q: Which Is Better, A Piggyback Or A traditional Loan With Mortgage Insurance?

Like most choices in life both of these solutions have their pros and cons and they need to be weighed against each borrower's individual needs, resources and ability to accurately predict and understand their own future finances.

Although mortgage insurance may be discontinued after a fairly short period of time by making your regular monthly payments and watching your property appreciate in value, the second lien does not offer such options; you have already agreed to a given number of payments to retire the second lien, and that cannot be changed without paying the loan up in full or refinancing the property altogether.

Note: If for any reason during the course of this arrangement you suffer a situation, through accident or neglect, that will damage your good credit status your lender will be obligated to keep the mortgage insurance enforced. If you are hoping to receive tax benefits from your loan situation you must also give the government a detailed and verifiable itemization of all of your deductions for expenses annually.

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