Refinancing second mortgage
If you buy a home with less than 20% down or if you haven't built up at least 20% equity before mortgage refinancing, you'll normally need to pay private mortgage insurance (PMI). This safeguards the lender in case you default on the mortgage loan.
It is worth mentioning in this regard that the U.S. Public Interest Group in Washington and other consumer-advocacy groups have been pressuring Congress to enact legislation that would require lenders to stop billing for PMI automatically once a borrower achieves about 20% equity. At present, the borrower generally has to ask a lender to stop charging for PMI, which is not easy to do. In fact there are lenders in the market who won't cancel PMI. Because of that simple reason there is a growing number of buyers that are avoiding PMI altogether by getting what's known as a "piggyback mortgage." In simple terms, a piggyback mortgage is a second mortgage that closes simultaneously with the first.
It is worth noting that a piggyback mortgage is also known as an 80-10-10 loan because it involves a first mortgage for 80% of the purchase generally offered at a lower rate, a second trust loan (second mortgage) for 10% at a slightly higher rate and the remaining 10% as a down payment. But variations, such as 75%-15%-10%, are also available in the market.
If experts are to be believed, this can significantly reduce a borrower's monthly payments. Furthermore, the interest on the second mortgage is tax-deductible--PMI payments are not. In areas where housing is more costly, buyers find that the piggyback mortgages can help them keep their primary mortgages below the conforming limits.
At the moment, 30-year fixed rate home mortgages that exceed $417,000 are considered "jumbo" (non-conforming) mortgages, which carry higher interest rates. The best part about piggyback mortgages is they are very flexible. Therefore, you can either take it out as a home equity installment loan (HEIL) where you get a lump sum all at once or as a home equity line of credit (HELOC) where you can pay off the line of credit and draw down on it and use the funds for other purposes without having to apply for another loan. And, finally you have an option of refinancing both loans when your home appreciates in value and possibly pay a lower rate of interest, making your savings even greater.
It is worth noting that the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC), generally known as Fannie Mae and Freddie Mac, respectively, subsidize the real estate mortgage market by buying mortgage loans originated by banks and other lenders. Though, these government-sponsored entities (GSEs) are subject to maximum loan amounts (e.g., $417, 000 for a single-family home). Theoretically speaking, loans up to these limits are considered conforming loans. On the other hand any loan over that amount is considered either a jumbo or a super-jumbo loan. Though, always remember that conventional loans can be either conforming or non-conforming loans (jumbo and super jumbo loans). Furthermore, jumbo loans run between $417,001 and $650,000. Loans above $650,000 are termed as super jumbo loans.
There is no denying that jumbo loans offer attractive features, including fast closings, no points, no private mortgage insurance (PMI), no lender fees, and even interest-only new home loan mortgages. The primary drawback of jumbo loans is that they carry higher interest rates and points than conforming loans. Moreover, it's normally harder to qualify for jumbo loans due to inconsistent underwriting requirements and increased lender risk. Fact remains that larger down payments may also be needed for jumbo loans. Moreover, PMI is temporary. Thats why, once your house builds the necessary equity, you can request that the lender stop charging you for PMI (if it doesn't automatically drop off). In few areas, it may take less time than you think due to fast appreciation.
If experts are to be believed, you can avoid a jumbo loan by taking out a piggyback loan (1st and "piggyback" 2nd mortgage). Identical to jumbo loans, there's no PMI with the piggyback 2nd mortgage. The main benefit of two loans are that your interest rates and points could be lower than for a jumbo loan, depending on your FICO score and other factors. Qualification is a tad simpler, too. In addition, because the loans generally are through the same lender and close at the same time, closing costs on the 2nd are usually very low. Piggyback loans are also more than perfect for those requiring 100% financing, an option thats generally harder to get with jumbo loans. The drawbacks are that you now have two mortgages to pay and it may be harder to refinance or get home equity loans later on.
The zero down 80/20 mortgage is an excellent loan for those that are lacking the down payment required for other types of mortgages.
In simple terms, the 80 20 mortgage is simply two loans for 100% of the purchase price. Furthermore, it is a first mortgage at 80% of the purchase price with a 20% second mortgage. According to experts, if you are a conforming borrower, doing your loan in this manner will save you from having to pay mortgage insurance. Mortgage insurance is almost always mandatory when you have less than 20% down. But with the 80 20 loan you can get rid off this mandatory evil.
On the other hand, if you are a sub-prime borrower, doing you loan in this manner will typically keep your interest rates % to 2.5% lower than doing a 100% one loan. A 100% one loan is generally one loan for the entire purchase price. More often than not you will have two choices when it comes to the second mortgage portion of the 80 20 mortgage. Fact remains that the second mortgage can either be a fixed second mortgage or it can be a line of credit.
In case if it is a fixed second mortgage the interest rate is fixed for the entire length of the mortgage. In theory, most fixed second mortgages are a 30 due in 15. Depicting that the second mortgage is amortized over 30 years, but is due in 15 years. Normally it is a balloon payment. Dont let this scare you. Statistically speaking, people refinance or sell their home every 7 to 9 years any ways.
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