Piggyback Mortgages: the Whys and Hows

Piggybacks began to avoid PMI and what has become of it today.

(PRWEB) January 20, 2005 -- Mortgages have become a part of our day to day life. Yet we fail to grasp the intricacies of the concepts. This is an attempt to familiarize you with one such term-Piggyback mortgage.

The need of the hour is- the least down payment possible. Some years from now, lenders practiced a limit: Loan –to-value ratio should not exceed 75%. This freed the lender of risk. But with more demands for lump sum amounts, this limit was pulled off and an alternative Private Mortgage Insurance (PMI) imposed.

Piggybacks had been primarily introduced to circumvent PMI. Piggyback mortgages are basically two mortgages, one over the other. The amount is broken down, so that one can avoid the insurance premium as well as the down payment.For more information on Piggybacks log onto http://www.mortgagefit.com/piggy-back.html

The law states that PMI must be paid if the LTV exceeds 80%. The less the down payment made, more it is a risk to the lender.

For example: If 95% is borrowed; only 5% remains and the chances are that the debtor will default and the lender gets next to nothing. More so if the house equity does not appreciate.

PMI had been introduced to reduce this risk. But the hassle to make premium deposits when added to the expense weighs heavily on the pockets.

Piggyback involves a roundabout way to acquire 80% LTV. One can opt for a 75% or 80% first mortgage which does away with the PMI. Then another 20% or 15% respectively borrowed as second mortgage .This leaves barely 5% as down payment, which in most cases is affordable than a 20% down. The second mortgage is usually locked in at a higher rate of interest and gets paid off faster.

But piggybacks are not very popular. It involves two separate mortgages which involves separate costs which ultimately add up to more than loan payment plus PMI. Because the second mortgage is paid off earlier, some lenders may impose prepayment penalties as well.

The lure of avoiding PMI had set off this mortgage type but it has found other takers, especially, jumbo loans and first time buyers. A dream home is the ultimate aim, but the crux of the matter being we should be able to afford it. This is what makes people explore new options and soon piggyback will find new uses as well.

For more in-depth knowledge regarding mortgage, you can log onto: http://www.mortgagefit.com

###