Piggyback loan
Is it better to get one home loan or a piggyback loan?
Let me explain: You want to buy a house for $400,000. You are going to put 5% down payment. You can get a 95% loan of $380,000, or you can get a piggyback loan. A piggyback loan is getting a first loan with a second loan “on its back” simultaneously. The first loan will be for 80% LTV, or $320,000, and the second will be for 15% of the loan, or $60,000. The CLTV is 95%, same as the one loan of 95%. The piggyback loan is also called 80/15/5. I hope you can figure out why. You can do the same if you are putting 10% down. It would be called 80/10/10. Or if you put no money down, you can get 80/20.
What are the advantages of getting a piggyback? No PMI - private mortgage insurance. Whenever your LTV exceeds 80%, the lender requires you to buy PMI. Because a loan of over 80% LTV is considered high risk of default, the PMI company will pay off your loan to the lender if you default. So PMI is an added expense to you. This expense is not tax deductible like mortgage interest.
A piggyback loan does not require PMI because the first loan is not over 80%. The second loan is assuming the risk if you default.
Another advantage is keeping the first loan within the conforming limits. In our scenerio, if you get a straight loan of $380,000, you have to pay jumbo loan rates whereas with a piggyback, you pay conforming loan rates with a loan of $320,000.
What are the disadvantages of a piggyback? Lenders charge an additional $195 to do this second loan. That’s a small price to pay. A greater disadvantage is the shorter term and the higher interest rate. It is usually a 15 year term. The interest rate is about 2-3% higher than the first loan. But it’s a small loan amount, so the difference in payment is not substantial.
I haven’t done a loan with PMI for a long time, ever since lenders began doing the piggyback. Overall, it is usually a good idea to do a piggyback rather than a straight first.