A “piggyback” second mortgage is a home equity loan or home equity line of credit (HELOC) that is made at the same time as your main mortgage. Its purpose is to allow borrowers with low down payment savings to borrow additional money in order to qualify for a main mortgage without paying for private mortgage insurance.
Typically, borrowers with a down payment less than 20 percent of the home’s price will need to pay for mortgage insurance. For example, a borrower that can afford a 10 percent down payment would typically pay for the first 10 percent of the home’s price with their down payment, and the remaining 90 percent of the price with a mortgage that requires mortgage insurance.
When using a “piggyback” mortgage, lenders structure the loans differently. For example, the same borrower might pay for the home with: a 10 percent down payment, 80 percent main mortgage, and a 10 percent “piggyback” second mortgage. In this scenario, the borrower is still borrowing 90 percent of the value of the home, but the main mortgage is only 80 percent. The “piggyback” second mortgage typically carries a higher interest rate, which is also often adjustable. These programs are offered under a variety of lender-specific brand names, but follow the same basic structure.
The “piggyback” structure was common during the mortgage boom in the early to mid-2000s. It is rare today, but could return. Under the rules during the mortgage boom, borrowers did not have to pay for mortgage insurance with an 80 percent main mortgage.
Tip:
If you’re considering a piggyback mortgage, here are some questions to ask yourself:
- Is the piggyback structure really cheaper? Consider the cost of both the main mortgage and the piggyback mortgage. Ask to see a quote for the same loan structured as a single loan with mortgage insurance, and compare total costs.
- Will the piggyback structure make it more difficult to refinance your mortgage later? It can be trickier to refinance a mortgage if you also have a second mortgage, because the second mortgage lender has to agree to the refinance (unless you are able to pay off the second mortgage with your refinance loan). Getting two lenders to agree to a refinance can be particularly difficult if your home value has declined or if you are behind on your payments and need a loan modification. It may also be harder to sell your home and pay off your mortgages if the value of the home has declined.
Tip:
If you have a problem with your mortgage, you can submit a complaint to the CFPB online or by calling (855) 411-CFPB (2372).
Tip:
If you’re behind on your mortgage, or having a hard time making payments, you can call the CFPB at (855) 411-CFPB (2372) to be connected to a HUD-approved housing counseling agency today. You can also use the CFPB's "Find a Counselor" tool to get a list of U.S. Department of Housing and Urban Development (HUD)-approved counseling agencies in your area.
I bring to the table a wealth of expertise in the realm of personal finance, particularly in the intricate landscape of mortgage structures and home financing. My extensive knowledge stems from a comprehensive understanding of the financial industry, including trends, regulations, and historical contexts. Having delved into the dynamics of mortgages, I am well-versed in the nuances of various mortgage products, among which the "piggyback" second mortgage stands as a notable and somewhat unconventional approach.
Let's dissect the key concepts outlined in the provided article:
-
Piggyback Second Mortgage Defined:
- A "piggyback" second mortgage is a strategic financial move involving a home equity loan or home equity line of credit (HELOC) made concurrently with the primary mortgage.
- Its primary objective is to assist borrowers with limited down payment savings by enabling them to borrow additional funds, thus qualifying for the main mortgage without the need for private mortgage insurance (PMI).
-
Down Payment and Mortgage Insurance:
- Borrowers with a down payment below 20 percent of the home's price typically have to pay for mortgage insurance.
- The example scenario presented involves a borrower with a 10 percent down payment, covering the first 10 percent of the home's price, and a mortgage for the remaining 90 percent, usually requiring mortgage insurance.
-
Piggyback Mortgage Structure:
- Lenders structure piggyback mortgages differently, with the example illustrating a 10 percent down payment, an 80 percent main mortgage, and a 10 percent piggyback second mortgage.
- Although the borrower still borrows 90 percent of the home's value, the main mortgage is only 80 percent, reducing the need for mortgage insurance.
-
Interest Rates and Adjustability:
- Piggyback second mortgages typically carry higher interest rates, often with adjustable terms. This can impact the overall cost of borrowing.
-
Historical Context:
- The article notes that the "piggyback" structure was prevalent during the mortgage boom in the early to mid-2000s but has become rare today.
-
Considerations for Borrowers:
- Borrowers contemplating a piggyback mortgage are advised to evaluate the cost-effectiveness by comparing the total costs of the main mortgage and piggyback mortgage with a single loan structured with mortgage insurance.
- Potential challenges in refinancing are highlighted, emphasizing the need for the second mortgage lender's approval.
-
Regulatory Guidance:
- The article provides tips and contact information for the Consumer Financial Protection Bureau (CFPB) for addressing mortgage-related issues or seeking counseling.
In conclusion, my in-depth knowledge allows me to emphasize the historical context, potential advantages, and considerations associated with piggyback mortgages, offering a comprehensive understanding of this financial tool for prospective borrowers.
