"Thinking About an 80/20 Mortgage or Piggyback Loan? Think Again!"
A piggyback mortgage, or 80/20 mortgage, is designed to reduce or eliminate the main barrier to investing in
rental properties – the down payment. This is considered an "exotic" way to finance investment properties, and it is ripe with risk.
Its recent rise in popularity is due to the fact that most people – myself included – simply don't have $20K or more stuffed in their mattresses to fund a down payment. This consumer need, coupled with the rapid price appreciation seen in the first half of this decade, enabled the development of non-traditional, high-LTV mortgage programs such as this.
WHAT IS AN 80/20 MORTGAGE?
A piggyback loan is a way to obtain 100% financing without having to pay
private mortgage insurance
with a greater than 80% loan-to-value ratio (i.e., you put less than 20% down) is subject to PMI. A piggyback mortgage gets around this because it funds the down payment via a secondary mortgage.
Piggyback loans come in several varieties based on the mix of primary & secondary financing. You can have 80/20 loans, 80/15/5 loans, 80/10/10 loans, etc.
For example, an 80/20 loan means that your first mortgage covers 80% of the purchase price, and your second mortgage covers the other 20%. An 80/15/5 loan means that your first mortgage covers 80% of the purchase price, your second mortgage covers 15%, and you cover 5% from your own pocket.
Usually, the secondary or piggyback loan will be from a different lender than your primary loan. The secondary loan is also considered the riskier of the two from the lender's perspective, and thus will always have a higher interest rate (usually 3-4% higher than the rate on the first mortgage).
- You can dramatically reduce your upfront out of pocket expense.
- Most times the incremental interest expense on the secondary loan is less than the cost of PMI.
- It's easy to payoff the secondary loan at any time, while eliminating PMI is usually difficult.
- The interest on the secondary loan is more easily understood from a
rental tax deductions
- The lender requirements are usually more stringent due to the risk inherent in piggyback loans
- There is no wiggle room in terms of the
With no preexisting equity cushion, the property must appraise at the purchase price or higher.
- If you run into problems paying your loan, you'll have to haggle with 2 lenders instead of one.
- There are cheaper ways such as using a
loan, which can be used to minimize your out of pocket expense.
In all likelihood, you will find it difficult if not impossible to obtain a loan of this nature because:
- The subprime debacle has forced lenders to dramatically tighten their underwriting criteria, and as such most have eliminated risky products like piggyback loans.
- The housing slump is creating a temporary short-term drop in property values, which has created difficulty getting adequate appraisals where there is no equity cushion.
- Even if you do find a lender offering this product, your credit and income level must be impeccable for you to even be considered.
So again, the 80/20 mortgage market has all but dried up. And that's a good thing. There are other options to obtain close to 100% financing that are less risky and cheaper.
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