Friday, October 9, 2015

What is a Piggyback Mortgage?


While mortgages are a good time, private mortgage insurance (PMI) is not. Usually, if you don’t have enough money to make a down payment of at least 20 percent (keeping the loan-to-value ratio (LTV) under 80%), you’re required to get mortgage insurance. Fortunately, clever people figured out a loophole—the piggyback mortgage.

How it works

There are three parts to this solution, dubbed the 80-10-10 format. The first is to make a down payment of 10 percent. Step two is to get a “piggyback mortgage”, possibly in the form of a home equity loan or home equity line of credit, to cover the remaining 10 percent of the down payment. Finally, you will get a mortgage for 80 percent of the purchase price. And there you have it: 20 percent down and no mortgage insurance.


Other types of piggyback mortgages do exist, like the 80-5-15, or the 80-15-5. The middle number stands for the second mortgage and the third the down payment. These formats aren’t as common as the 80-10-10, but they are available and useful for some people.

Are there any possible problems?

Unfortunately, it’s not all rainbows and ponies with a piggyback mortgage. When it comes time to refinance, if the lender that is issuing the piggyback mortgage doesn’t agree to resubordination, you could be forced to re-evaluate your situation and call an audible.

Resubordi-huh??

It’s like this: you have two mortgages, the primary mortgage and the piggyback mortgage. Naturally, the primary mortgage is first, and the piggyback mortgage is second in line, or as they say, subordinate to the primary mortgage.

Resubordination is the process of keeping the primary mortgage in first place. Each lender will want their loan to be first in line, as that loan will have a higher priority and be paid off first, so it’s possible that the lender will not agree to remain in second place when you refinance.

This creates a problem because conventional first mortgage lenders require that their loan is in the first position in order to refinance. Usually, this isn’t a problem, as resubordination is a fairly common practice.


They won’t resubordinate! What do I do?!?!

If your second lender won’t agree to resubordination, you could get a cash-out refinance, and then use that cash to pay off the piggyback mortgage. You could also get a cash-in refinance, which would reduce your loan-to-value ratio. After you talk it out with your lenders, a solution will usually become clear.

Bottom Line

If you want to avoid paying private mortgage insurance, getting a piggyback mortgage is one way to make that happen. Just make sure you talk through the refinancing process with your lenders so you know what your options will be when that time comes.

source: totalmortgage.com