Piggyback Second Mortgages:
How to Borrow a Down Payment
by Shawn Carvin, Senior Mortgage Banker
One of the biggest hurdles for homebuyers, especially first-time buyers, is the down payment. Saving a down payment can take years. This is something that many would-be homebuyers don’t fully grasp, and when they decide they’re ready to settle down and purchase their own little piece of Los Angeles, they learn that they really aren’t ready after all. But all hope is not lost for prospective home buyers who find themselves in this situation: enter the piggyback mortgage.
The ‘purchase-money second mortgage’ option
A ‘purchase-money second mortgage’ involves purchasing a home with two loans instead of one. This financing option is also sometimes referred to as a ‘piggyback second,’ but unlike more common second mortgages, both the primary mortgage loan and piggyback second mortgage are taken out at the same time.
These loans are often structured as an 80/10/10, meaning the first mortgage covers 80% of the home purchase price, the second mortgage is equal to 10%, and the borrower makes a 10% down payment. But piggyback loans with 80/15/5 and 80/5/15 configurations are also possible. The primary and piggyback second mortgages can — and frequently do — come from different lenders. But because the primary mortgage has a loan-to-value ratio of 80%, the borrower is not required to pay for private mortgage insurance (PMI).
Benefits of piggyback second mortgage financing
The piggyback mortgage strategy provides borrowers with many of the benefits of making a 20% down payment without having all the cash necessary to do so. In addition to avoiding the expense of PMI, the borrowers will not need to jump through the hoops necessary to eliminate the PMI payments as they normally would once they have accumulate sufficient equity.
Another benefit is that an effectively larger down payment may enable the borrowers to qualify to purchase a more expensive home. With the stratospheric home prices here in the Los Angeles area, this is a very important benefit to many home buyers.
Even if borrowers do have a significant amount of cash on hand, the piggyback mortgage can work in their favor when the cost of the property is in the jumbo loan range. Jumbo loans usually entail higher interest rates, so making the purchase with two separate loans with lower interest rates can result in substantial long-term savings.
Taking out two mortgages generally also means paying closing costs on both loans. The piggyback second mortgage usually carries a higher interest rate; in some cases, the difference can be quite substantial. In contrast to PMI — which only applies until sufficient equity accumulates — the piggyback second mortgage doesn’t go away until it’s paid off.
Also, it’s possible to run into difficulties when trying to refinance the home because any second-lien holders must agree to take a backseat to the primary lender. For this reason, the terms of the second mortgage frequently require it to be paid off before refinancing can occur.