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"Thinking About an 80/20 Mortgage or Piggyback Loan? Think Again!"


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A piggyback mortgage, or 80/20 mortgage, is designed to reduce or eliminate the main barrier to investing in multi family 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 or PMI.

Traditionally, any property mortgage 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).



ADVANTAGES


  • 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 standpoint.


DISADVANTAGES


  • The lender requirements are usually more stringent due to the risk inherent in piggyback loans
  • There is no wiggle room in terms of the property appraisal. 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 zero down loan, which can be used to minimize your out of pocket expense.


BOTTOM LINE


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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2 Responses to Thinking About an 80/20 Mortgage or Piggyback Loan? Think Again!

  1. Zardoz says:

    I agree completely. the old “80/20” loans are rare but they are still out there if you know where to look. Try a local bank that you already have a relationship with. Also keep in mind that the 20% does not need to be tied to the other 80%, as this portion can be funded with a line of credit, credit card, or even a hard money lender. So yea, it’s difficult to obtain but not impossible if you are creative with your financing plan.

  2. Misha says:

    Its like you read my mind! You seem to know so much about this, like you wrote the book in it or something. I think that you can do with some pics to drive the message home a little bit, but instead of that, this is excellent blog. A great read. I’ll definitely be back.

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