If you don’t have 20% to put down on a home, you may have the option to take a piggyback loan. This loan, as the name suggests, is one loan on top of the other. You take out both loans at the same time, using the funds from the second loan as your down payment.
You borrow 80% of the sales price with your first loan. Your second loan is for 10% of the purchase price. The remaining 10% comes from you in the form of a down payment.
While it’s not a common approach to buying a home, it is an option when you are trying to figure out the best way to make your mortgage affordable.
Keep reading to learn the pros and cons of this financing method.
The Pros of the Piggyback Loan
There is one major benefit to the piggyback loan – you avoid paying PMI. For many borrowers, that’s enough of a benefit right there. While you will have a second mortgage payment, at least you can make that money back in appreciation and eventually profit when you sell the home. You will never see a dime of the money you spent on PMI again, so some borrowers opt for the piggyback approach.
You may be able to write off the interest on your second mortgage. Depending on the size of the loans, you may reduce your tax liability just by writing off the loan’s interest. If you paid PMI, you would not have the benefit of writing this fee off, which would leave you with a higher tax liability.
You may also be able to get away with a smaller down payment out of your own pocket. With only 10% down, you can avoid PMI but still keep money in your bank account. On a $200,000 loan, that’s a difference of $20,000 between the 10% and 20% down payment.
The Cons of the Piggyback Loan
The piggyback loan could be more expensive than taking out a larger 1st mortgage. You can cancel PMI when you owe less than 80% of the home’s value. If you take out a 2nd loan, it’s yours until you pay it off in full. Because you’ll pay interest on the loan amount, the costs could add up to more than you would pay for PMI over the life of the loan.
You will have to pay closing costs on two loans. This could also get more costly for you. It depends on the lender and the type of loan, but all loans have some fees. This could mean paying two underwriting fees, two processing fees, and a few other typical lender fees. This will vary by lender, though. Some lenders will waive the fees on the 2nd mortgage if you get both loans from them.
You may have trouble refinancing in the future. If you decide you want a lower payment or you want to take cash out of your home’s equity, that 2nd mortgage could cause you trouble. Unless you pay it off with the first loan, wrapping them all into one loan, you will need the second lender to agree to subordinate the loan. This means stay in second lien position. Many lenders will do this, but some may cause a problem, especially if you don’t have a good payment history.
The 80-10-10 loan is a great way to get the loan you need while avoiding PMI. It’s also a great way to decrease the money you need to close on a loan. But it does have its downsides. Make sure you weigh the pros and cons of the process to see if it’s best for you or if you should choose to pay the PMI for the time being. You can then either refinance to get out of it or request that it be removed once you owe less than 80% of the home’s value.