80/10/10 Mortgage: Benefits of Piggyback Loans for Savvy Homebuyers

80/10/10 Piggyback Mortgage: How Does a Piggyback Loan Work?

Are you dreaming of a new home? Short on down payment funds? No worries—you're not alone. Piggyback loans: a stepping stone to your dream home. Second mortgages, or piggyback loans, let you borrow for your down payment. Your second loan and primary mortgage offer the upfront financing you need to qualify for your desired property. Fixed-rate and adjustable piggyback loans are available to fit your needs. Good credit and debt-to-income ratios are required for piggyback loans. Piggyback loans may help you get into your new house if you fulfill the requirements.

What Is a Piggyback Loan?

A piggyback loan is a second mortgage taken out simultaneously with your primary mortgage. It allows you to borrow more than a standard mortgage alone would allow. With a piggyback loan, you take out two mortgages at once. The first is a traditional mortgage for a portion of the home's value, say 80%. 

Piggyback loans cover the remaining 20%, so you may borrow the whole purchase price. Since piggyback loans are riskier, lenders usually charge higher interest rates and shorter terms of 5 or 10 years. You make separate monthly payments on each loan. The goal is to pay off the piggyback loan through increased income, paying extra when you can, or refinancing into a single mortgage before the term ends.

How Does an 80/10/10 Piggyback Loan Work?

  • Buy a house with a piggyback loan, and don't put down 20%. Do you want to know the key to its magic? It's like getting two mortgages. The first mortgage covers 80% of the purchase price. Second or "piggyback" mortgages cover 10-15% extra. You need 5-10% of your money. 

  • Putting 20% down on both loans locks in a reasonable first mortgage rate with a piggyback loan. The piggyback loan subsequently covers the remaining portion of your down payment. For instance, if you buy a $200,000 property, your initial mortgage would be a creative $160,000 (80% of the total). The $20,000 piggyback loan is 10% of $200K. Only $10,000 (5%) of your money is needed. 

  • Interest rates are higher for piggyback loans because lenders take more risk. You make separate monthly payments on the two mortgages. The payments on the piggyback loan are often interest-only at first. After a few years, you can refinance the two mortgages into a single new mortgage and loan with better terms if rates have dropped. 

  • Piggyback loans make buying a property with less down easier. The second mortgage's higher interest rate means you'll pay more over time. Refinance immediately if you can decrease your combined rate and simplify your payments. 

What Is a Piggyback Mortgage Used For?

A piggyback loan is a second mortgage taken out with your original mortgage. The piggyback loan gives extra funds for various uses. 

Down payment assistance 

A piggyback loan is usually used for a down payment to qualify for a primary mortgage with a lesser down payment. A piggyback loan might cover the difference if the original lender asks 20% down, but you only have 10%. 

Closing costs 

Piggyback loans sometimes cover appraisal, title, and origination fees at house closing. Closing costs average 2%–5% of the purchase price. A piggyback loan gives you the funds to pay these costs at closing, so you're not paying out of pocket. 

Renovations 

Suppose you need extra money for home renovations or improvements after purchasing a property. In that case, a piggyback loan can provide the necessary financing. You can use the funds from the second mortgage to remodel the kitchen, add a home addition, put in a pool, or make other upgrades to the home. 

Debt consolidation 

Some homeowners use piggyback loans to pay off high-interest debts like credit cards by consolidating the debts into a lower-interest second mortgage. This may make debt repayment cheaper and faster. 

Piggyback loans require solid credit, regular income, and adequate home equity to finance primary and secondary mortgages. Lenders consider piggyback loans riskier than first mortgages. Therefore, they charge higher interest rates. However, they allow homeowners to pay more, cover closing costs, fund improvements, or pay off debts. 

Types of Piggyback Loans

Second Mortgage 

A second mortgage, or a home equity loan, uses your home equity as collateral. It's a separate loan in addition to your existing first mortgage. The interest rates on second mortgages are usually higher than on first mortgages. These loans typically have shorter terms of 5 to 20 years. Up to 80–90% of the equity in your house may be borrowed. 

HELO- home equity line of credit

Maximize the potential of your home with a captivating financial tool known as a HELOC - a revolving credit line secured by your house. Like a magical card of abundance, you can borrow money up to your limit, repay it, and access the power to borrow again. HELOC interest rates are variable and often higher than mortgage rates. Repayment terms are typically 10-20 years. You can access 50-90% of your home equity. 

Cash-Out Refinance 

With a cash-out refinance, you pay off your existing mortgage and obtain a larger one. The difference between the loan amounts is paid out to you in cash. Interest rates may be slightly higher than a standard refinance. Closing costs typically range from 2-5% of the new loan amount. Up to 80% of home equity is available.

A piggyback loan requires consistent earnings, strong credit, and enough home equity. The combined loan-to-value ratio of your first mortgage and piggyback loan typically can't exceed 80% of your home's value. Piggyback loans provide an easy way to tap into your home equity without taking out a traditional second mortgage with higher interest rates and shorter terms. 

How do you qualify for a piggyback loan? 

Piggyback loans require particular qualifications. The lender's criteria vary; however, there are certain essentials. 

  • First, your credit score and history are assessed. The minimum score needed for a piggyback loan is typically around 580, though higher is better. For the primary mortgage, most lenders want to see at least 620. If you're getting a second mortgage, aim for 680 or above. Check your credit reports and scores ahead of time to make sure there are no errors or signs of fraud. Pay off any high-balance cards or other debts to improve your score. 

  • Your income, employment, and down payment amount will also factor in. Most lenders prefer applicants with solid income and 2-3 years of career experience. Get at least 20% of the purchase price down, divided between your primary and secondary mortgages. 

  • Avoid debt-to-income ratios above 43%. This implies your monthly debt, including home payments, should be under 43% of gross income. Boost your DTI by clearing debts or increasing your down payment. 

  • Keep your second mortgage loan-to-value ratio under 80%. To attain 80% loan-to-value, you must pay 10% down on your first and second mortgages for a $200,000 home.  

  • The lender validates your application information during underwriting. Show pay stubs, tax returns, bank statements, and other papers to verify you can repay debts. 

These requirements may qualify you for a piggyback mortgage. But remember, just because you qualify doesn't mean it's the best option for your situation. Compare piggybacks to other low-down-payment programs to choose what works for your needs and budget.

Example of an 80-10-10 Mortgage loan

An imaginary family named The Smiths is determined to purchase a $500,000 house. With a $10,000 down payment, they can afford to leave a $450,000 debt.
However, they're wary of the high interest rates and PMI associated with a conventional 90% mortgage loan. Here, the 80-10-10 mortgage loan represents a viable alternative.

In essence, the Smith family would take out an 80% mortgage valued at $400,000 alongside a 10% second mortgage of $50,000. The remaining 10%—$50,000—is a down payment. As a result, they bypass the PMI costs, securing a pleasant interest rate and manageable monthly payments.

Good reasons to get an 80-10-10 loan 

An 80-10-10 loan provides tangible, cost-effective incentives that make it a prudent mortgage strategy, especially for specific homebuyers:

PMI Dodge: PMI payment, ranging around $30-$70 for each $100,000 borrowed, is avoided using an 80-10-10 mortgage.

Jumbo Loan Evasion: If your desired home cost surpasses the conforming loan limit, an 80-10-10 loan might help keep your first mortgage below the cutoff, saving you from taking a jumbo loan.

"An 80-10-10 loan bypasses PMI costs, ensures relatively lower interest rates, and offers financial flexibility—making it an attractive financing alternative."

Interim Home Sale Resolution: Are you hoping to sell your current house to finance your new one? An 80-10-10 loan can bridge the gap in down payment, and you can use the profit from your home sale to retire the second mortgage without refinancing.

Short-term Cash Boost: An 80-10-10 loan leaves you with more short-term liquidity, suitable if your emergency funds are dwindling or your new home requires significant repairs.

So, it's pivotal to consider these points, conduct comprehensive research, or consult a mortgage professional before committing to an 80-10-10 mortgage.

Requirements for an 80-10-10 Loan

An 80-10-10 loan is only for some. Borrowers typically need to meet certain eligibility criteria:

  1. Good to excellent credit score, usually 700 or above.
  2. A debt-to-income ratio is under 43%.
  3. Solid employment history and stable income.
  4. Proof of ability to afford simultaneous loan payments.

The requirements vary by lender and the borrower's financial situation, so discussing these aspects with your mortgage consultant is important.
"An 80-10-10 loan represents an alternative path to homeownership, especially for borrowers desiring to avoid PMI or those unable to make a large down payment."

What if a loan has a loan-to-value ratio higher than 80%? 

LTV ratios are one consideration in mortgage, home equity, and line of credit qualifying. However, it can significantly affect a borrower's interest rate. Mortgage and home-equity applicants with LTV ratios below 80% receive the lowest interest rates from most lenders.

Any LTV ratio over 80% may need private mortgage insurance. The loan amount may rise 0.5% to 1% yearly. A $100,000 loan with 1% PMI would cost $1,000 annually ($83.33 monthly). PMI is mandatory till LTV reaches 80% or less. As you pay down your loan and your home appreciates, your LTV ratio will fall.

The smaller the LTV ratio, the higher the loan approval odds and the lower the interest rate. Borrowers are less likely to need private mortgage insurance. Not all lenders demand an 80% LTV ratio to avoid PMI, but most do. This criterion is occasionally waived for borrowers with strong incomes, low debt, or significant investment portfolios.

Advantages of the 80-10-10 Loan

An 80-10-10 loan carries many potential advantages for some homebuyers. Here are the most common benefits you might enjoy:

1. Avoiding PMI
Lenders often require PMI to protect themselves when a borrower fails to pay at least 20% of the property's cost upfront. This insurance means an added monthly expenditure for the homeowner, but with an 80-10-10 loan, you can sidestep this extra cost.

2. Greater Buying Power
Since a borrower does not have to save as much for a down payment, this loan can also enable them to finance a more costly house.

3. Possible Lower Interest Rate on Primary Loan
A loan covering 90% of the home's worth may have a higher interest rate than the primary mortgage, representing 80% of the property's value.

Disadvantages of the 80-10-10 loan

While the 80-10-10 loan has compelling advantages, it also has some downsides to consider:

1. Higher Interest on Secondary Loan

The second mortgage in an 80-10-10 arrangement often commands a higher interest rate, which could potentially wipe out the savings made on PMI.

2. Increased Risk
Juggling two mortgage payments simultaneously can raise the chance of default or late payments, adding more risk to the borrower.

3. Greater Closing Costs
Going through the process of securing two mortgages could result in higher closing costs at the time of purchase.

Always measure the pros and cons based on your financial circumstances and homeownership goals.

Alternatives to an 80-10-10 Mortgage loan

If the 80-10-10 loan seems like an unrealistic fit, fear not! Many alternative mortgage options better align with your financial goals.

1. FHA Loans

FHA loans are government-backed mortgages with more lenient credit requirements and lower down payments. While PMI is still required, this could serve as an appealing option for home buyers with weaker credit scores or less savings.

2. VA Loans

If you're a qualified service member, veteran, or surviving spouse, the VA offers loans with no down payment or PMI requirements.

3. Traditional Mortgages

For many, a conventional 15- or 30-year fixed-rate mortgage is preferable. While PMI may be necessary if the down payment doesn't reach the 20% threshold, you can cancel it once you've built up the necessary equity in your home.

Piggyback strategy for current homeowners

One alternative that functions like a piggyback loan is to attempt to sell your present house and purchase a new one at the same time. You can use a loan secured by your present house to finance all or part of the down payment on a new property instead of taking out two mortgages. You will be allowed to utilize the selling earnings to settle the debt secured by your house.

You can finance using a HELOC or home equity line of credit. Many types of financial aid can help you succeed. HELOC eligibility requires paying off or decreasing your mortgage. Ownership of 20% of your property is necessary for a loan.

Bottom Line

The 80-10-10 loan could be a unique, viable option for those who want to buy a home but need help with the 0everyday obstacles of a large down payment or PMI. Ultimately, find the home financing plan that best fits your financial context and aspirations. Take the time to carefully appraise your situation and seek advice from mortgage professionals to make an informed decision about your house-buying adventure.

FAQs

Why is an 80-10-10 mortgage beneficial?

The main benefit of an 80-10-10 mortgage is a lower down payment. This financing arrangement allows homebuyers to put 10% down instead of 20%, making housing more affordable. It also helps purchasers avoid PMI, lowering monthly payments.

What drawbacks come with an 80-10-10 mortgage?

This kind of mortgage has advantages, but there are downsides. Two mortgages may increase monthly payments, which is a drawback. The second mortgage, frequently an adjustable-rate loan, might boost payments if interest rates rise. In a property market slump, you may be "underwater" with a home worth less than your mortgage.

Can I pay off the second mortgage early?

It is possible to prepay a second mortgage, often known as a home equity line of credit (HELOC). The second mortgage only accrues interest when used, which is advantageous. Fully or partially paying it off might reduce interest payments. After settlement, the HELOC provides financial flexibility.

Is an 80-10-10 mortgage good for first-time buyers?

First-time homeowners may benefit from an 80-10-10 mortgage. It lowers the down payment, making homeownership more affordable. That removes the need for private mortgage insurance (PMI), commonly required for lesser down payments.

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17 Nov, 2023

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