How to Save on Your Mortgage With an 80/15/5 Loan
Many homeowners become intimidated or dissuaded from home buying when facing a 20% down payment and private mortgage insurance. A Piggyback Loan is a great solution to help potential homeowners avoid PMI (private mortgage insurance) and secure a lower down payment on a higher-balance mortgage. An 80/15/5 Piggyback Loan can help you save on your mortgage. Contact a professional to discuss this option for you!
What is a piggyback loan?
It’s essentially a mortgage solution to homeownership where the borrower would take out the initial mortgage loan, a second smaller mortgage loan, and pay a lower down payment to avoid higher pricing. In addition to the regular loan amount a borrower would take out on the home, the borrower would take out another small loan to cover part of the down payment amount. Essentially, a piggyback loan is a second mortgage taken out on your home to avoid PMI and cover part of the down payment amount.
How does a piggyback loan work?
A piggyback loan is essentially getting a smaller loan to cover part of the down payment. In most situations, the second mortgage loan is likely to be a HELOC (Home Equity Line of Credit). However, it is important to remember that this can vary lender by lender and borrower by borrower. Contact our team to discuss specific protocols.
It works by essentially taking out two mortgages and paying a down payment. The three components of this loan are:
- Initial mortgage
- Piggyback mortgage loan
- Down payment
These three components allow borrowers to avoid PMI, lessen their down payment, and potentially afford a more expensive property. It allows borrowers to purchase homes above the conforming loan limit with a lower down payment. Although the structure of this loan may vary, the most common structure of a Piggyback Loan is an 80/15/5 Piggyback Loan.
80/15/5 Piggyback Loan Breakdown
One of the most common piggyback loans is an 80/15/5 piggyback loan. This means that the structure would be as follows:
80% is the initial mortgage, 15% is the second mortgage, and only 5% is the down payment!
This is HUGE because the borrower can borrow a higher amount with only 5% down and no mortgage insurance!
80/10/10 Piggyback Loan Breakdown
A typical piggyback loan is an 80-10-10. These three numbers represent the proportions of the three components of the loan discussed above. In an 80-10-10 piggyback loan, the structure is as follows:
80% is the initial mortgage, 10% is the second mortgage, and 10% is the down payment.
75/15/10 Piggyback Loan Breakdown
Similarly, another common structure of this loan is a 75-15-10. The breakdown of this loan is as shown:
In this loan, 75% is the initial mortgage, 15% is the second mortgage, and 10% is the down payment.
The 75-15-10 loan is typically used to purchase condos to try to qualify for a lower mortgage rate!
Pros & Cons of a Piggyback Loan
While it is apparent that there are many advantages of this type of loan, it’s important to weigh the pros and cons of any mortgage decision you make.
The Advantages of Piggyback Loans:
- You can avoid paying PMI. Typically, when you put down less than twenty percent as a down payment, you are required to pay mortgage insurance. This is an added expense. With a piggyback loan, you can put less down and avoid paying mortgage insurance.
- You can purchase a condo for a lower interest rate. If a condo has an LTV of 75% or more, lenders will likely provide a higher interest rate. With this type of loan, you can avoid the higher interest rate on a condo by having an LTV of less than 75%. This is crucial as there are many lucrative benefits to owning a condo. The savings on interest rates could save you thousands of dollars over the life of your loan.
- You can avoid a jumbo loan. A jumbo loan has some hefty requirements. If you want to buy a higher value home and want to avoid a jumbo loan. With this type of loan, you are taking out less on a mortgage loan.
The Drawbacks of Piggyback Loans:
- There are potentially harder qualifications. When you are going the route of a piggyback loan, you are qualifying for an initial loan and a HELOC loan. Therefore, many lenders will require a higher credit score and a lower debt-to-income ratio than a conventional loan.
- The price of closing costs could be greater. With both loans, you will have to pay closing costs. So, you are paying closing costs on two loans instead of one. Closing costs can add up to six percent of the total loan amount!
Ultimately, a piggyback loan is beneficial for you if the pros outweigh the cons in your situation. Make sure that you are saving more money by avoiding mortgage insurance than you are paying on your interest with both loans! If you are considering a piggyback loan and want to discuss if it is right for you, contact us today for free!