There’s more than one way to buy a home, and more than one way to get a mortgage, too. While conventional, 30-year loans that allow you to finance 80 percent of a home’s purchase price are the most common, homebuyers have plenty of other options to explore if this particular mortgage doesn’t work for them.
One common choice is to put down only 10 percent of the home’s price and take out a loan for the other 90 percent. If you choose to put down less than 20 percent, you are typically required to pay private mortgage insurance in addition to the principal and interest on the loan. This arrangement can be lead to a much larger monthly payment than if you put down 20 percent. The larger loan (90 percent vs. 80 percent of the home’s value) and the additional mortgage insurance premium can add up to put an affordable house out of reach.
Another choice is the piggyback mortgage loan. This type of mortgage can allow you to buy the house you want and to avoid private mortgage insurance — even if you only have a 10 percent down payment. But there are some drawbacks.
Below, we’ll explain how it works, along with the pros and cons of using a piggyback loan to buy a home.
How Does a Piggyback Mortgage Loan Work?
First, you need to choose a lender you want to work with who will underwrite this type of loan. You’ll put down 10 percet in cash. The lender will provide you with a first mortgage loan for 80 percent of the home’s purchase price and a second mortgage loan for 10 percent of the purchase price. This second loan “piggybacks” on top of the original mortgage loan. (These loans are also called 80/10/10 loans, based on the way the percentages of funds break down.)
While this is similar to having a 20 percent down payment in that you don’t have to pay PMI, the piggyback loan is still debt and you will need to pay monthly interest and ultimately repay it. In fact, you’ll make two monthly mortgage payments each month.
The Pros of a Piggyback Loan
Piggyback mortgage loans allow you buy with less money down, so you won’t need to part with that much of your own liquid assets.
It can also allow you to avoid paying PMI as part of your monthly payments.
However, there are some drawbacks to getting a piggyback loan.
The Cons of a Piggyback Loan
Unfortunately, piggyback loans can come with serious disadvantages. They can end up being far more expensive than a conventional (and simpler) mortgage loan.
A piggyback loan means you take out two loans to buy a home — and you need to repay both of them. That means two sets of origination fees and two sets of principal and interest payments. Furthermore, the interest rates on a piggyback loan are often higher than on your primary mortgage.
Many piggyback loans have adjustable interest rates, which means your rate can go up in the future. The added costs and higher interest rates can really add up.
Before deciding on a piggyback loan, you should carefully crunch the numbers to see how expensive it will be compared to other options. Also be aware that this type of financing is not always available to all borrowers.
Alternatives to Piggyback Loans
You should also know that there are alternatives to piggyback loans that have many of the same benefits.
One such alternative is using a home ownership investment from a company like Unison. If you have enough for a 10 percent down payment, Unison will match your down payment funds, giving you at least a 20 percent down payment.
This means you don’t need to take an additional loan, nor do you need to worry about paying PMI. The home ownership investment from Unison is not a loan, so you don’t need to pay interest or make monthly payments on it. Instead, you will share a portion of the appreciation or depreciation in the home’s price with Unison when you decide to sell.
With a home ownership investment, you can increase your purchasing power or get a lower monthly payment, without taking on more debt.
Again, you should explore all of your options and talk to a financial advisor before making a decision. Take a look at what works best for you — both emotionally and financially. Then decide on the best route to buy your new home.
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