Piggyback Loan Benefits: Double Financing, Double Advantages

Real estate financing can be confusing, especially when you're trying your hardest to secure a mortgage that doesn't require the strictest terms and conditions or a heavy down payment.

But did you know that there's a way to stretch the limits of conventional loan structures without breaking them? That's where piggyback loans come into play.

Don't be fooled by the unconventional name; a piggyback loan is a serious financial tool that could potentially help you pursue your dream home with fewer restrictions than you thought possible.

Let's take a closer look at this strategic, flexible solution.

Understanding Piggyback Loans

Before we jump into the benefits of a piggyback loan, it's best to get a quick understanding of how they work first.

Traditionally, a homebuyer would secure a single mortgage to cover the cost of their new home, with the expectation of making a down payment, often around 20% of the property's value depending on the program they secure.

But a piggyback loan lets borrowers reduce or even eliminate the need for a substantial down payment. How? Because, as the name suggests, this type of loan is actually two loans taken out simultaneously to purchase a home.

The primary loan generally covers up to 80% of the home's value, while the secondary loan covers a portion of the remaining cost, whether it's 5, 10, or 15%.

That means borrowers may be able to reduce their down payment to as little as 5% without needing private mortgage insurance (PMI).

Benefits of Piggyback Loans

Piggyback loans may appear complex, but they come with several potential advantages worth understanding. Here's how this financing strategy could benefit qualified borrowers.

Bypassing PMI

One of the biggest advantages of a piggyback loan is the potential to avoid PMI. Typically, if a borrower can't offer a 20% down payment on a conventional loan, the lender requires PMI. While this protects lenders in case the borrower defaults, it adds an ongoing cost to the loan.

PMI costs vary by lender, loan-to-value ratio, and credit profile, but borrowers can review estimated ranges through resources like the Consumer Financial Protection Bureau's guide to PMI. By structuring financing as a piggyback loan, borrowers may avoid this expense altogether, which can lead to meaningful savings over time.

Lower Down Payment

Piggyback loans also pave the way for a potentially lower down payment, which can be a significant hurdle for many borrowers. These loans can reduce the amount needed upfront, freeing capital for other uses.

By using the second loan to cover part of the down payment, borrowers are left with a smaller amount to pay upfront.

It could mean the difference between delaying homeownership and being able to move forward sooner. It could also allow borrowers to reinvest funds into their businesses or diversify their portfolios rather than tie up their wealth in a single asset.

Potentially Lower Interest Rates

Piggyback loans can sometimes yield a lower blended interest rate over time when compared to taking out a larger traditional mortgage that requires PMI.

Even though the second loan in a piggyback structure often carries a higher interest rate than the primary loan, the amount is smaller and can typically be paid off more quickly than the primary loan.

Because the primary loan generally stays within the conforming loan limit set annually by the Federal Housing Finance Agency (FHFA), it may qualify for more favorable pricing than a jumbo loan.

Quicker Equity Build-up

Perhaps one of the most overlooked benefits is the potential for quicker equity build-up due to the structure of a piggyback loan.

Initially, monthly payments may be higher, but there's a silver lining. Once the smaller secondary loan is paid off, the overall mortgage balance decreases, which can support faster equity accumulation.

For example, the secondary loan may carry a 15-year term versus a 30-year term on the primary mortgage. Paying off the secondary loan in roughly half the time of a standard mortgage can help borrowers build equity at a faster pace.

This faster build-up of equity not only means owning a greater share of the home sooner, it can also offer long-term financial flexibility, potentially including the ability to tap into home equity for other uses down the road.

Potential Tax Benefits

Finally, potential tax advantages are worth considering. Depending on the borrower's tax situation, interest on both loans may be deductible, which can create a favorable tax scenario. Deductibility rules for mortgage interest are outlined by the IRS in Publication 936.

It's crucial, however, to consult with a tax professional or financial advisor for guidance tailored to your specific circumstances, since tax laws and benefits can vary and change.

Final Thoughts

While piggyback loans are an innovative and flexible tool for borrowers who understand the importance of personalizing their financing strategy, it's important to remember that they're not for everyone.

If you want to explore a piggyback loan, start by choosing the right partner, that's where Modern Day Lending comes in. Our team understands the intricacies of these types of loans and the particular challenges that self-employed individuals face.

Our goal is to understand your unique financial landscape and help identify a lending solution that fits your needs. With us, you can expect a tailored approach, comprehensive guidance, and ongoing support.

Here's what you'll typically need to get started:

• A year-to-date profit and loss statement balance
• Two years' worth of personal tax returns
• Two months' worth of personal asset statements
• Two years' worth of business tax returns (if applicable)
• A driver's license

If you want more information about piggyback loans, please reach out to one of our experts.