As mortgage rates in the U.S. remain at their record lows, buyers now have the option to turn to "piggyback" mortgage loans.
A piggyback mortgage loan or the practice of "piggybacking" allows a buyer to divide the total home loan amount by acquiring two mortgages instead of one jumbo loan. It literally means carrying one mortgage over another. According to Investopedia:
"It is a type of mortgage where a second mortgage or home equity loan is taken out by a borrower at the same time the first mortgage is started or refinanced. Piggyback mortgages are frequently used to lower the loan-to-value ratio (LTV) of a first position mortgage to under 80%, thereby eliminating the need for private mortgage insurance (PMI)."
The practice of using piggyback loans started during the "mortgage crisis era" in 2007, when getting a loan was difficult as the property market was in gloom. Now that the real estate market is resurging, piggyback mortgages may be a good alternative.
However, a piggyback loan has its pros and cons. It is important that the buyer evaluate the feasibility of a piggyback loan.
When should you consider a piggyback Loan?
If you have good credit and can pay at least 10 percent down payment for the loan you are availing, you might opt for a Piggyback loan. However, you must consider how much you will end up paying on the whole, because the second mortgage will usually have a higher interest.
"With so little disparity in interest rates, buyers need to factor in the added expense of two sets of closing costs and how long they plan to own the home to see if two loans really will save them money or ultimately cost them more. Also, not all lenders will permit two mortgages on a new home purchase, and it may especially not be allowed for a second home or investment-home purchase," Randy Carver, president of Ohio-based Carver Financial Services, said to the Wall Street Journal.
Check out the advantages and disadvantages of a piggyback Mortgage Loan, here.
Meanwhile, the average rate on a 30-year fixed mortgage fell to 3.4 percent in the week ended April 25, according to Freddie Mac's weekly survey. The average rate on the 15-year fixed mortgage dropped to 2.61 percent. This will make refinancing and home-buying more attractive to potential investors.