The Piggyback Second Mortgage provides an option to home buyer who can not afford a twenty percent down payment. Without enough funds for twenty percent down payment, the home buyer pays an expensive Private Mortgage Insurance (PMI). Mortgage Lenders are able to provide the usual ten percent second mortgage without PMI. Only a few mortgage lenders can provide fifteen or twenty percent second mortgage without PMI.
Another term for piggyback second mortgage are 80/10/10, 80/15/5, 80/20/0 mortgage. The 80/10/10 is the most popular. There are only a few who provide 80/15/5, and 80/20/0. The three numbers represents the percentage of first mortgage, second mortgage, and down payment. For example, the 80/10/10 means eighty percent first mortgage, ten percent second mortgage, and ten percent down payment.
The Advantages of Piggyback Second Mortgage
The demand for piggyback second mortgage increased lately. There are a few reasons. The monthly mortgage payment costs less than a mortgage with PMI. The PMI premium varies on different states and situation. The PMI protects the mortgage lender in case of default on mortgage payment. However, the PMI has no benefit at all to the home buyer.
The interest on first and second mortgage are tax deductible from the time being. Mortgage interests are actually one of the important tax deductions for home owners. In fact, some homeowners elect not to pay off mortgage early for tax purposes.
The home buyer avoids the higher interest for Jumbo Mortgage Loan. Every year, the government sets conventional mortgage limit for purchase. If the mortgage exceeds the conventional mortgage limit for purchase, the mortgage lenders considers the mortgage application as Jumbo Mortgage Loan. Since the Jumbo Mortgage Loan offer higher risk to mortgage lenders, the mortgage lenders give higher interest rate on Jumbo Mortgage Loan.
The Disadvantages of Piggyback Second Mortgage
The house prices goes up or down. As the house prices goes up, the equity on the house grows as well. When the home equity goes up to twenty two percent, the home owner can cancel the PMI. The Homeowners Protection Act of 1998 requires the removal of PMI on loans made after July 29, 1999 after the homeowners pay down twenty two percent of equity.
Mortgage Lenders made Piggyback Second Mortgage more difficult to acquire than traditional mortgage. To qualify for this mortgage, the home buyer needs 680 Fair, Isaac, & Co (FICO) score. The FICO score measures the individual record in using credit.
Second mortgage comes with its own costs. The home buyer pays the same kind of costs as the first mortgage. Furthermore, the home buyer pays the same penalties on mortgage payment default.
The final verdict on Piggyback Second Mortgage
The Piggyback Second Mortgage benefits the home buyers, but the second mortgage requires some crunching on numbers. With this second mortgage, the home buyers pay less mortgage payment, and income tax. The PMI providers are feeling the pinch on loss business. In the future, PMI could be a tax deductible as well. The House Resolution 3098 and Senate Bill 132 (which are currently on pending) allow deducting the PMI on income tax.