What is a Piggyback Loan and How Does it Work?

Buyer Tips, Mortgage Information / By /

Courtesy of Gene Mundt, Portfolio Mortgage, Chicago

 Definition and Purpose of a Piggyback Loan:  To reduce the amount of the first loan amount, used in addition to a Borrower’s own funds (Down Payment).

Advantages of Using a Piggyback Loan:  The Piggyback is typically used to reduce the first loan amount to an 80% level, so as to eliminate the cost of Mortgage Insurance, or to conform to certain programs’ requirements of a 20% Down Payment.

 

 A Piggyback Loan can also reduce loan amounts of first mortgages down below a Jumbo Loan* level$417,000+ in most markets.  Higher in high-end markets.)  At the lower, non-Jumbo Loan level there are frequently better or more options in the Conforming Loan Markets (not always).

Drawbacks:  A second lien (Mortgage/HELOC) is filed against the property, as collateral for the loan/note.  There are typically additional Closing Costs from the Lender, and from the Title Company.  There is a second loan application process, and sometimes, duplication of efforts and documentation needed.

Example of a Piggyback Loan: 

                    Sales Price:                         $400,000
               1st Loan Amount:             $320,000  (80%)
               2nd Loan Amount:           $  40,000  (10%)  Piggyback
               Buyer’s Down Payment: $ 40,000  (Buyer has only 10% Down)
                Mortgage Insurance:       Eliminated!  (1st Loan is at 80% Value.)

Savings in Payments:   In order to determine your savings you must compare thesavings with the resulting payment associated with the 2nd Loan  … VERSUS … the payments for a loan at 90% Loan-to-Value with Monthly Mortgage Insurance.

In this type of scenario:

  • Borrowers SAVE the Cost of Mortgage Insurance
  • 1st Mortgage Loan Payment is LOWER, reducing the LTV (Loan to Value) of the FIRST Loan

 


     Piggybacks are also used to avoidusing a Jumbo Loan as well.

 

An example of a Jumbo Price Scenario using a Piggyback Loan follows:

Sales Price:                 $600,000   (Buyer has 20% Down = $120,000)
Jumbo Loan:              $480,000

–  OR  –

1st Mortgage Loan:  $417,000   (Maximum “Conforming” Loan*)
$  63,000  ( Piggyback 2nd Mortgage)
$480,000  TOTAL Loans

     * Used to avoid a Jumbo Loan Program if market conditions/Guidelines Dictate

In my next post, “Jumbo .. or Piggyback Loan.  Which is Best?” …  I will talk about the pros and cons of each type of loan, how each loan can be utilized, and what steps you should take when making your financing decision.

Gene Mundt is a 30+ year veteran of the mortgage/banking industry, with extensive knowledge and experience in mortgage and credit services, management, and real estate appraising.  He is also an IL Certified Financial Planner.  This unique combination of education, experience, and expertise affords him more complete and in-depth resources from which to service his clients and their needs.

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