Hi, I’m Abby Rubio, a professional writer with years of experience writing about personal finance and homebuying. In this article, I’m going to talk about piggyback mortgages, what they are, how they work, and whether they might be a good option for you.
The Problem with Traditional Mortgages
For homebuyers, the most common way to finance a home purchase is through a traditional mortgage. While traditional mortgages can be a great option for many people, they can also come with some drawbacks. One of the biggest drawbacks is the requirement for a large down payment. Most lenders require at least 20% down, which can be a significant amount of money for many people.
The Solution: Piggyback Mortgages
Piggyback mortgages, also known as second mortgages, are a way to avoid the large down payment requirement of traditional mortgages. The way they work is by taking out two separate loans: a first mortgage for 80% of the home’s value, and a second mortgage for the remaining 20%. The second mortgage effectively acts as the down payment, allowing you to avoid having to come up with a large lump sum of cash.
How Do Piggyback Mortgages Work?
As mentioned, piggyback mortgages involve taking out two separate loans. Here’s how it typically works:
- You take out a first mortgage for 80% of the home’s value.
- You take out a second mortgage for the remaining 20% of the home’s value.
- You use the second mortgage to pay for your down payment.
- You make two separate monthly payments: one for the first mortgage and one for the second mortgage.
It’s important to note that piggyback mortgages can come with higher interest rates and fees than traditional mortgages. However, they can still be a good option for homebuyers who don’t have a large down payment saved up.
What Are the Pros of Piggyback Mortgages?
There are several benefits to piggyback mortgages:
- They allow you to avoid the large down payment requirement of traditional mortgages.
- They can be a good option for homebuyers who don’t have a lot of cash saved up.
- You can potentially save money on private mortgage insurance (PMI), which is typically required for borrowers who put less than 20% down on a home.
- You may be able to get a lower interest rate on your first mortgage by taking out a second mortgage.
What Are Some Tips for Getting a Piggyback Mortgage?
If you’re considering a piggyback mortgage, here are some tips to keep in mind:
- Make sure you understand the terms and conditions of both the first and second mortgages.
- Shop around for the best interest rates and fees.
- Make sure you can afford the monthly payments on both mortgages.
- Consider working with a mortgage broker who can help you find the best piggyback mortgage for your needs.
Frequently Asked Questions
- Q: What’s the difference between a piggyback mortgage and a traditional mortgage?
- A: Piggyback mortgages involve taking out two separate loans, while traditional mortgages only involve one loan.
- Q: How much can I borrow with a piggyback mortgage?
- A: The amount you can borrow will depend on your credit score, income, and other factors.
- Q: Are piggyback mortgages a good option for everyone?
- A: No, piggyback mortgages may not be the best option for everyone. It’s important to consider your individual financial situation before deciding whether a piggyback mortgage is right for you.
- Q: Can I use a piggyback mortgage to buy any type of home?
- A: Generally, piggyback mortgages can be used to buy any type of home, including single-family homes, condos, and townhouses.
Summary
Piggyback mortgages can be a good option for homebuyers who don’t have a large down payment saved up. By taking out two separate loans, homebuyers can avoid the large down payment requirement of traditional mortgages. However, piggyback mortgages can come with higher interest rates and fees, so it’s important to shop around and make sure you understand the terms and conditions of both loans before making a decision.