Thursday, October 11, 2007


Bank of Albuquerque Mortgage What Are Piggyback Loans? Depending on the lender or broker you’re talking to, Piggyback loans are also called: a. Combo Loans b. 80/10, 80/15, 80/20, 75/25 loans Piggyback loans combine a 1st mortgage (usually 75 - 80% of the appraised value, to avoid PMI), with a “piggyback” 2nd mortgage (usually 10%, 15%, 20% or 25% of the appraised value). Both loans are closed at the same time, and through the same lender (at least in our case). Because the loans are closed at the same time through the same lender, usually the closing costs on the 2nd mortgage are minimal. Remember, because you have two mortgages, you will have two mortgage payments instead of one. What's the Advantage of a Piggyback Loan? Piggyback loans can be used effectively in three different ways: 1. Avoiding PMI charges. This is far and away their most popular use. PMI insurance is charged on any conventional 1st mortgage loan that exceeds 80% of the appraised value. By keeping the 1st mortgage amount at 80% or less, and taking out a 2nd mortgage for the remainder, you avoid the PMI charge. 2. Avoiding Cash Out Penalties on Refinances. Beginning in 2003, Fannie Mae and Freddie Mac increased the loan costs on any refinance that used part of the proceeds to pay off a 2nd mortgage or for other purposes, if the LTV exceeded 70%. Again, by taking out a 1st mortgage for 70% of the appraised value, and doing a piggyback 2nd for the remainder, you avoid the cash out penalty. 3. Splitting a Jumbo loan into two non-Jumbo loans. Jumbo loans (loans in excess of $417,000) usually carry higher rates than non-jumbo loans. By taking out a 1st mortgage just at $417,000, and doing a piggyback 2nd for the remainder, you avoid paying the higher jumbo rates on either mortgage. Note that in all the cases above, it is not always beneficial to do a piggyback 2nd. It depends on a number of variables, such as: a. The rate on the 2nd mortgage. Second mortgage rates are almost always higher than 1st mortgage rates. b. The proportion of the loan that is 1st mortgage vs 2nd mortgage. As a general rule, the more of your loan safely contained in the (lower rate) 1st mortgage, and the less contained in the (higher rate) 2nd mortgage, the more beneficial a piggyback loan is. c. The PMI, cash-out penalty and/or Jumbo rate charge. The exact cost of whatever it is you’re trying to avoid. What Are the Types of Piggyback Loans? The first mortgage is just a normal 1st mortgage, fixed, ARM, etc. But the 2nd mortgage, depending on the lender and program, can come in two different flavors: a) A fixed rate for a specified period of time, just like your first mortgage, or like a car loan. Usually but not always, the 2nd mortgage will be for a shorter term than the 1st mortgage. b) A line of credit, where the rate and monthly payment vary depending on your balance, just a credit card account. For information contact: Bank of Albuquerque Mortgage Lisa Crain Phone: (505) 837-4214 Fax: (505) 855-7316
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