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80-10-10 Piggyback Loans
A piggyback mortgage loan, officially known as an 80-10-10 loan, is a great way to save money on buying a home, and at LBC Mortgage, we’re here to help you make sense of piggyback loans and how to understand if choosing one is the best to help you buy a home in the State of California.
What is a Piggyback Mortgage?
Simply put, a piggyback mortgage is when you take out two separate loans for the same home. The first mortgage is usually 80% of the home’s value with the second one being for 10%, with the remaining 10% being your down payment amount — hence the name 80-10-10 loan. You might also see the latter two amounts adjusted, so it’s entirely possible to get a loan that’s something like 80-15-5 or 80-5-15 with the first number being the primarily loan, the second number being the amount of the second loan, and the third being your down payment amount.
Why Get an 80-10-10 Loan?
A piggyback loan is generally used to help prospective homeowners avoid the need to pay extra for private mortgage insurance. In short, private mortgage insurance or PMI is the insurance policy that lenders require you to take out if you’re putting less than a 20% down payment down on the home. In this way, the lender is able to recoup the money they’ve lost if you default on your home loan.
So that begs the question of whether or not an 80-10-10 loan or private mortgage insurance is better in your case. For that, it’s a good idea to consult with a professional who understands the details of different types of home loans and who can help you find the best option for your unique needs.
Piggyback Mortgage or Private Mortgage Insurance?
A piggyback mortgage makes sense in cases where you’ll be borrowing a substantial amount of money, such as with a jumbo loan. Sometimes, jumbo loan borrowers will get another mortgage because they can take advantage of the lower interest rate on their first loan. They can then pay off the second loan faster and save money over time on interest payment. Plus, you can deduct the interest you pay on both loans from your taxes. Just keep in mind that there’s a limit on the second amount, up to the first $100,000. Still, any savings is better than none!
Key Advantages of Piggyback Mortgages
Avoiding Private Mortgage Insurance (PMI)
One of the most notable advantages of a piggyback mortgage is the ability to avoid paying private mortgage insurance (PMI). Typically, PMI is required for homebuyers who cannot make a down payment of at least 20%. By structuring the financing with an 80-10-10 loan, homebuyers can bypass this additional expense, potentially saving hundreds of dollars each month.
Lower Interest Rates
Another advantage is the potential for lower interest rates. The primary mortgage in a piggyback setup often comes with a competitive rate, as it covers only 80% of the home's value. Additionally, the second loan might also offer a favorable rate, especially if it is a home equity line of credit (HELOC).
Increased Home Purchasing Power
A piggyback mortgage can increase your purchasing power by enabling you to afford a more expensive home than you might otherwise qualify for with a single loan. This is particularly beneficial in competitive housing markets where higher-priced homes are more common.
Greater Flexibility in Financing
With a piggyback mortgage, you have greater flexibility in managing your finances. The second loan can be tailored to your needs, whether you choose a fixed-rate loan or a HELOC. This flexibility can be advantageous for managing cash flow and financial planning.
Tax Deductibility
In some cases, the interest paid on the second loan in a piggyback mortgage can be tax-deductible. This is an added financial benefit that can reduce your overall tax liability, further enhancing the cost-effectiveness of this mortgage strategy.
Buy or refinance a property with or without showing your tax returns
How Do I Qualify for a Piggyback Loan?
Remember that with piggyback mortgage loans, you’re actually applying for two loans at one time. You’ll want to make sure that you have a credit score of 680 or higher, as well as a debt-to-income ratio that’s no higher than 43% when the costs of both loans are considered.
Understandably, you want the interest rates of both loans to be as low as possible. That’s why it’s a great idea to work with a specialty mortgage company like LBC Mortgage. Our knowledgeable, friendly and helpful experts will take the time to walk you through the process, as well as answer any questions you may have along the way. When it comes to 80-10-10 loans or any other type of home loan, the professionals at LBC Mortgage work hard to help you get the best deal so that you can save time and money and get a home loan that works hard for you!