The Second Piggyback Mortgage offers an option to home buyers who cannot afford a 20 percent down payment. Without sufficient funds for the twenty percent down payment, the home buyer pays for expensive private mortgage insurance (PMI). Mortgage lenders can provide the usual 10 percent second mortgage without PMI. Only a few mortgage lenders can provide a fifteen or twenty percent second mortgage without PMI.
Another term for the second piggyback mortgage is mortgage 80/10/10, 80/15/5, 80/20/0. The 80/10/10 is the most popular. Only a few provide 80/15/5 and 80/20/0. The three numbers represent the percentage of the first mortgage, the second mortgage, and the down payment. For example, 10/80/10 means eighty percent of the first mortgage, ten percent of the second mortgage, and ten percent of the down payment.
The advantages of a second mortgage in tow
Lately the demand for second mortgages has increased. There are a few reasons. The monthly mortgage payment costs less than a mortgage with PMI. The PMI premium varies in different states and situations. The PMI protects the mortgage lender in the event of a mortgage default. However, the PMI has no benefit to the home buyer.
The interests of the first and second mortgages are tax deductible from the moment. Mortgage interest is actually one of the important tax deductions for homeowners. In fact, some homeowners choose not to pay off the mortgage early for tax purposes.
The home buyer avoids the higher interest rates on the Jumbo Home Loan. Each year, the government sets a conventional mortgage limit for the purchase. If the mortgage exceeds the conventional mortgage limit for the purchase, mortgage lenders treat the mortgage application as a Jumbo Mortgage Loan. Since the Jumbo Home Loan offers higher risk to mortgage lenders, mortgage lenders place a higher interest rate on the Jumbo Home Loan.
The disadvantages of the second mortgage in tow
House prices go up or down. As home prices rise, so does the value of your home. When home equity rises to 22 percent, the homeowner can cancel the PMI. The Homeowner Protection Act of 1998 requires the removal of the PMI on loans made after July 29, 1999 after homeowners pay twenty-two percent of the principal.
Mortgage lenders made the second piggyback mortgage more difficult to acquire than the traditional mortgage. To qualify for this mortgage, the homebuyer needs a 680 Fair, Isaac, & Co (FICO) score. The FICO score measures an individual’s history of credit use.
The second mortgage has its own costs. The home buyer pays the same type of costs as the first mortgage. In addition, the home buyer pays the same penalties for default on the mortgage.
The final verdict on the second mortgage in tow
The second piggyback mortgage benefits home buyers, but the second mortgage requires some math. With this second mortgage, home buyers pay less for their mortgage payment and income tax. PMI providers are feeling the impact on the loss business. In the future, the PMI could also be tax deductible. House Resolution 3098 and Senate Bill 132 (currently pending) allow the PMI to be deducted from income tax.