Applying for a home loan that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac can be a challenge for some homebuyers. Some apply for a jumbo loan and others choose a piggyback mortgage.
What is a piggyback mortgage and why would you choose one? What is the point of one?
Alternative To a Jumbo Loan
If you cannot apply for a jumbo loan, you may be able to apply for a second “piggyback” loan. This is when two mortgages are opened at the same time, piggybacking one off of the other. This is used as an alternative to a jumbo loan when you want to purchase a home that exceeds the conforming loan limits.
Piggybacks Have Several Benefits…
One of the main benefits of piggyback mortgages is the PMI avoidance. PMI, or private mortgage insurance, is insurance that a borrower pays to shield the lender from loss in the event the borrower defaults on the loan. This insurance is paid when the borrower has put down less than 20% on the home at purchase.
How does a piggyback loan avoid PMI? It all has to do with it being two separate mortgages: A 10% piggyback loan in addition to a 10% down payment can bring a borrower’s down payment up to 20%.
…But Know the Potential Drawbacks
You cannot cancel a piggyback mortgage. The second loan doesn’t go away until it is completely paid off, and because you have two mortgages, refinancing is more difficult. The second mortgage is also more likely to carry a higher interest rate so before you choose to use a piggyback, budget carefully.
How Can I Qualify?
Before you decide to apply for a piggyback mortgage, ask yourself these questions:
- Is a piggyback going to be cheaper in the long run?
- Do I see myself needing to refinance in the future?
Because this is two different mortgages, you will have to apply and qualify for both separately; that means all the expenses that that entails, like origination fees and closing costs. If you are interested in a piggyback mortgage, talk with your lender and they can recommend a course of action.