As if! As if mortgages weren’t complex enough, now you’re going to tell me there’s such a thing as TWO mortgages stacked on top of each other — just to buy the same home you could otherwise get with one mortgage? Are you a glutton for punishment?
OK, calm down. You’re correct about the part that adding a second, or “piggyback,” mortgage might add complexity, but you’re not quite right about the fact that our buyer could have just as easily killed the proverbial financing bird with one stone/loan. Often, when we suggest borrower consider secondary financing, aka a piggyback loan, there’s a good reason for it, and we’re going to cover the top three of them below. If you view piggyback loan options as another tool in the mortgage toolbox, then you’ll start to see the value they provide when certain circumstances arise. So let’s jump into the mud with the pig.
Most buyers are aware that once their loan-to-value (LTV) exceeds 80% (in other words, they have less than a 20% down payment), they will be faced with private mortgage insurance (PMI). Some will therefore try to avoid this by breaking the financing into two loans, with the first mortgage at 80% of the value of the home, and the second or piggyback loan filling in the gap between the first mortgage and the buyer’s down payment. Classic example: $500K purchase price and a 10% down payment ($50K). The loan amount would be $450K and the buyer would have PMI, unless the buyer gets a first mortgage at $400K and a piggyback loan at $50K. In the piggyback example, the buyer is still going to finance a total of $450K, but because his first mortgage LTV is not over 80%, there is no PMI. Now, this same buyer will need to compare the terms of the financing. Will it be better/cheaper to go with PMI or the piggyback? Only the research will tell.
Circumventing Conventional Loan Limits
In the above example, we used a piggyback loan to avoid PMI, but what about purchase price points that would force an 80% LTV to be just above the conventional conforming loan limit? Same deal. Some of these buyers will circumvent that cutoff by using a piggyback. Today, for instance, the conforming loan limit in many areas is $484,350. But let’s say the buyer is considering a home that will sell for $675K. At 80% LTV, the loan amount would be $540K — above the conforming loan limit by $55,650. So, from time to time, we’ll see a buyer get a $484,350 first mortgage coupled with a $55,650 second mortgage and voila’, jumbo mortgage avoided.
Speaking of jumbo mortgages, especially in higher cost areas like the San Francisco Bay Area, even if you endeavor to buy a median-priced home with less than a 20% down payment, you will need a mortgage solution that often deviates from a single loan. Jumbo 80-10-10 options have been popular in our neck of the woods since at least 2015 and the reasons for that are primarily that the terms are very competitive and there is no PMI. If a buyer wishes to purchase real estate with less than 20% down and we’re talking about price points up to $2MM, we almost always consider a piggyback loan as one of the first tier options. In some parts of my county (Marin), in San Francisco, on the Peninsula and in the Silicon Valley, one can easily find a typical residence in the $1.2MM price point. If you’re putting 10% down on something like this, you’d have a first mortgage at $960K and a second mortgage, usually a HELOC, at $120K. This would be contrasted with any other single-loan jumbo option, though as the price points increase, it gets harder to find and qualify for such programs for many buyers.
While we always try to keep matters as simple as possible, because we realize that real estate transactions are inherently complex, sometimes there’s just no good way to avoid a piggyback mortgage solution. When you find yourself in this situation, we can help and we offer a wide array of both first and second mortgage programs that can be combined together to meet your needs. Oh, and when you do need a piggyback setup, we handle both loans as part of your singular process. We don’t send you out into the mud to fend for yourself on the first or second loan. We’ve got your (piggy) back.
Ha ha, charade you are,
Robert J. Spinosa
Vice President of Mortgage Lending
Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709
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