A Story of Two Home Loans
Once upon a time, before the mortgage crisis riveted the very roots of our volatile economy, homeowner’s found themselves piggybacking two loans. Instead of applying for a single jumbo mortgage, which would cost higher percentage rates, they would obtain two conventional loans, likely from different lenders, rendering their home as an 80-20 loan.
What defines a jumbo loan? Typically it is a loan that exceeds $417,000; however, in higher priced states and communities, this can be anything in excess of $625,000.
Becoming popular in the mid-2000s, piggyback loans developed when the real estate market was sizzling. As housing prices rapidly soared, many people could no longer afford the traditional 20-percent down payments that would avoid higher interest rates. So instead, a short cut, or loophole if you will, was presented. Borrowers were advised to take out a single loan for 80-percent of loan-to-value ratio and then another loan for 20-percent loan-to-value. This would effectively be combined to create a 100-percent loan, one where the homebuyer was not required to put down any down payments.
Fast forward to the current year of 2013, where the market is dominated by low interest rates. Many jumbo rates are as low as 3.65-percent, making the advantage of piggybacking loans a thing of the past.
There were many disadvantages for homeowners that piggybacked loans, including double closing costs, double loan fees, etc. Additionally, homebuyers would often have to make loans with two separate financial institutions, which would dramatically complicate the process for lenders, real estate agents, title companies and not to mention the buyers. Additionally, some lenders wrote in small print that if a second mortgage were paid off early, penalties and fees would be incurred, making it cost-prohibitive to piggyback a loan. This is especially true of today’s generation that rarely lives in one home for 30 years.
For loans in excess of $1 million, many lenders have a requirement of obtaining two separate appraisals. This is because a substantial risk is involved in large jumbo loans, especially for banks. Lenders carefully review the loan-to-value ratio before approving any loans. While most borrowers obtain an 80-percent loan-to-value ratio for jumbo loans, the major discount is effective at a 65-precent rate.
If a buyer is determining what type of loan to take out for a home, and is debating between a single jumbo mortgage and piggybacking two loans, he/she should weigh the following risks:
- Read all fine print to see if two loans are indeed cost prohibitive.
- A second mortgage can easily prevent a future home equity line of credit from being approved.
- People need to analyze what is the best use for their liquid cash funds.
My Hard Money Lenders specializes in working with hard money loans companies that loan from $50,000 to $25 million. They are a direct lender that offers fast loan funding, having flexibility in loaning on a variety of property types.