Piggyback Mortgage Definition

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Piggyback Mortgage Definition

What Is a Piggyback Mortgage?

Any extra debt over and above a borrower’s original mortgage loan, which is backed by the same collateral, is referred to as a piggyback mortgage. Home equity loans and home equity lines of credit are typical piggyback mortgages (HELOCs).

Key Takeaways

  • Any extra loan obtained on a property in addition to the primary mortgage is known as a piggyback mortgage.
  • Second mortgages, home equity loans, and HELOCs are a few examples.
  • In order to avoid paying PMI or to assist with making down payments on properties, piggyback mortgages are employed.

Understanding Piggyback Mortgages

Mortgages that are tacked on might have numerous uses. A borrower may be eligible for certain piggyback mortgages to assist with a down payment. Since all of the loans are backed by the same collateral, most borrowers can often only afford one or two piggyback mortgages.

Another way to avoid paying for private mortgage insurance, or PMI, is with a piggyback mortgage. In this scenario, a second mortgage or home equity loan is obtained concurrently with the first mortgage. For instance, under a “80-10-10” piggyback mortgage, the first loan would cover 80% of the purchase price, the second loan would cover 10%, and your personal down payment would cover the remaining 10%. Due to the original mortgage’s loan-to-value (LTV) being reduced to under 80%, PMI is no longer required. The first mortgage would be $144,000, the second mortgage would be $18,000, and the down payment would be $18,000, for instance, if your new house costs $180,000.

Types of Piggyback Mortgages

Down Payment Mortgages

A piggyback mortgage that provides a borrower with funding for a down payment is known as a down payment mortgage. Second mortgages are normally only accepted when they utilize money from a program that helps with down payments. The first mortgage lender must be informed of all sources of down payment cash utilized to get a mortgage.

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Second mortgages from numerous alternative lenders are often not accepted since they go beyond the original mortgage’s conditions and significantly raise a borrower’s risk of failure. Silent second mortgages are another name for down payment assistance mortgages.

Second Mortgages

A borrower may often only get a second mortgage using subordinated collateral if the collateral has equity in the residence. Home equity mostly depends on the amount a borrower has invested in their house. It is computed as the appraised value of the house less the remaining loan debt.

Since the property’s value might drop and the mortgage sum has not yet been significantly paid down, many borrowers find themselves in an underwater mortgage in the early stages of a mortgage loan repayment. There are a few possibilities for a second mortgage home equity loan for borrowers who do have home equity.

Both a normal home equity loan and a home equity line of credit are examples of these second mortgage products. A borrower’s available equity in their collateral serves as the basis for both a home equity loan and a home equity line of credit.

Home Equity Loans

Non-revolving credit loans, like the typical home equity loan, do not revolve. A borrower may get the equity worth as an upfront lump sum principal payment in a typical home equity loan. The lender will then often tailor the credit conditions such that the loan requires monthly payments. Home upgrades, debt consolidation, emergency capital needs, education payments for their children, and home improvements are just a few of the uses for which borrowers turn to home equity loans.

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Home Equity Lines of Credit

A home equity line of credit is a revolving credit account that provides a borrower with greater spending flexibility. This type of credit account has a maximum credit limit based on the borrower’s home equity. The account balance is revolving which means borrowers control the outstanding balances based on their purchases and payments. A revolving account will also be assessed monthly interest which adds to the total outstanding balance.

In a home equity line of credit, borrowers receive a monthly statement detailing their transactions for the period and a monthly payment amount they must pay to keep their account in good standing.

How Can a Piggyback Mortgage Be Used to Eliminate PMI?

Private mortgage insurance (PMI) is often required by lenders if the down payment on the loan will be less than 20%. A piggyback mortgage can be used to come up with the down payment cash to eliminate this requirement in some cases. Note that there may be certain terms or restrictions on either loan that could prevent using them in this way.

Is a Piggyback Mortgage a Junior or Senior Loan?

A piggyback mortgage is a junior loan, subordinate to the primary mortgage, which is the senior loan. Junior mortgages will often come with higher interest rates and be restricted to lower loan amounts, and may be subject to additional imitations.

Is a Piggyback Mortgage a Combination Loan?

When the same lender offers several loans for the same purpose, this is referred to as a combination loan (such as buying a home).It would be a combination loan if the same lender offered both a main mortgage and a HELOC as a piggyback mortgage. It wouldn’t if the HELOC were provided by a separate lender.

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The Bottom Line

A second mortgage, sometimes referred to as a “piggyback” mortgage, is a loan. There are several sorts, including down payment mortgages, second mortgages, home equity loans, and HELOCs. Through methods like a “80-10-10” piggyback mortgage, these loans may also be utilized to avoid paying PMI.

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