For many first-time homebuyers, one of the biggest hurdles to get past is coming up with the cash to make a down payment. In some parts of the country, scrounging up enough to put 20% down means saving tens of thousands of dollars. And of course, putting down 20% is important, because this allow the buyer to avoid costly private mortgage insurance (PMI). It’s no wonder that people feel intimidated by homeownership!
Before the housing market collapsed in 2008, it was fairly easy to get a home loan with no money down. This was accomplished by taking out a primary mortgage for 80% of the price of the home, then taking out a home equity loan for the other 20%. This means that people who didn’t have enough cash in the bank to make a hefty down payment could still purchase a home without PMI. This was a win-win, right?
Not exactly. Many of the homes purchased using this type of loan – known as a “piggyback” loan – were unaffordable to the borrowers and ended up in foreclosure. This is why banks largely stopped offering them – until now.
Piggyback loans are becoming more popular again, but does that mean you should consider one? Take a look at the information below to decide for yourself:
Avoid PMI at your own risk
The major reason that homebuyers are attracted to piggyback loans is that they’ll be able to avoid PMI, which can be very expensive. So in this sense, taking out a piggyback loan might be smart. But on the other hand, it’s important to remember that whenever you take out a home equity loan, you’re using your house as collateral on the loan. This is considered a risky move, because your home is a valuable asset – you don’t want to put it in jeopardy unless you absolutely have to.
You’ll still have to put something down
Even though banks are loosening up their lending standards a bit, we’re not moving back to a system where you can finance 100% of your home purchase. This means that even f you do take out a piggyback loan, you’ll still have to put down 5%-10%. This is something to keep in mind if you choose to employ the piggyback strategy.
No home equity loans in the future
Another thing to take into consideration before taking out a piggyback loan is that you may be giving up your ability to borrow against it in the future. This is because most banks won’t grant a home equity loan to a person who has yet to pay her first one back. This may or may not be a problem for you, but it’s important to remember that home equity is a source of funds to tap in the event of a serious emergency – if you use a piggyback loan, you may not have that option.
Piggyback loans are back on the lending landscape, but there are some important things to think about before using this type of financing to pay for your home. Be sure to use the information above as a guide to making this crucial decision!
