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Piggyback Mortgages are great to avoid paying the monthly Private Mortgage Insurance (PMI) payments which are not even tax deductible.

A piggyback is basically nothing more than a second mortgage closed at the same time with the first mortgage in such a way that the share of the first mortgage drops down to 80% of the total loan.

A common formula is 80-10-10 in which 80% is the first, 10% is the second (piggyback) mortgage, and the last 10% is the down payment.

In many cases, the piggyback is provided as a revolving home equity line of credit (HELOC) to pay for the recurring expenses. Studies show that the number of piggyback mortgages has quadrupled since 2000.

However, piggybacks have a couple of drawbacks.

First of all, you need a higher FICO (credit) score to qualify for the piggyback (about 680) than for the first mortgage (as low as 620 will do).

Secondly, a recent study by Standard & Poor’s (S&P) has shown that piggyback loans have a higher default risk than the others.

The study examining the performance of 640,000 piggyback loans secured between 2002-2004 has shown that piggyback mortgages are 43% more likely to default than the conventional first mortgages even when one statistically controls for such factors as the FICO score of the borrowers.

One reason that immediately comes to mind is the fact that, although the most common 30-year first mortgages have fixed rates, piggyback mortgage have variable interest rates that can zoom up and present an unplanned burden for the borrower.

Especially when the piggyback is provided as a HELOC (Home Equity Line of Credit) which is indexed to a floating rate (like the prime rate), the increases in future monthly payments should not come as a surprise.

Piggyback mortgages can save you some money upfront but as always – buyer beware. Check with your mortgage broker before making your final decision. It may be well worth it to get a copy of the original S&P study and read further on the topic.

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Ugur Akinci, Ph.D. is a Creative Copywriter, Editor, an experienced and award-winning Technical Communicator specializing in fundraising packages, direct sales copy, web content, press releases, movie reviews and hi-tech documentation.

He has worked as a Technical Writer for Fortune 100 companies for the last 7 years.

In addition to being an Ezine Articles Expert Author, he is also a Senior Member of the Society for Technical Communication (STC), and a Member of American Writers and Artists Institute (AWAI).

He is dispensing million-dollar plot ideas on a daily basis at his screenwriting blog SCRIPT BOILER (http://scriptboiler.blogspot.com).

You are most welcomed to visit his official web site http://www.writer111.com for more information on his multidisciplinary background, writing career, and client testimonials.

While at it, you might also want to check the latest book he has edited, PRIVATE TUTOR FOR SAT MATH SUCCESS 2006:

http://www.lulu.com/content/263630

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If you are buying a home and not forking out a down payment of at least 20%, the chances are you will be asked to pay for the Private Mortgage Insurance (PMI). The lender wants to protect himself against the borrower defaulting on the loan. But the cost of such a guarantee, PMI, is paid monthly by the borrower and not the lender.

Since the human mind is genetically wired to “get everything for nothing,” a solution had to be found to detour around the pesky PMI.

One solution kicks in automatically. According to the law, if you closed on your loan on July 29, 1999 or later, and if the amount you still owe on your loan falls below the 78% of your purchasing price, then PMI is not needed anymore.

A second solution is the Lender-Paid Mortgage Insurance (LPMI) in which the lender, and not the borrower, “pays upfront” the cost of the insurance but the total amount is rolled into the mortgage and amortized over the whole life of the loan. Thus its final cost is a lot more for the consumer. Not recommended.

Another solution to avoid the PMI is to obtain a Piggyback Mortgage.

The piggyback is actually a second mortgage that closes together with the first mortgage in such a way that the percentage of the first mortgage within the total loan drops down to 80% and hence the need for PMI can be circumvented legally.

There are a couple different versions of piggybacking. The most common is the “80-10-10″ mortgages in which the first mortgage makes up the 80% of the total mortgage, the second “piggyback” loan makes the 10%, and the customer provides the remaining 10% as down payment.

There are 80-15-5 and even 80-20 versions in which no down payment is required.

When you pay PMI, you can not deduct it from your taxes like the interest paid on a first mortgage. But the interest you pay on your piggyback (second) mortgage is also tax deductible.

—————————————————————————————–

Ugur Akinci, Ph.D. is a Creative Copywriter, Editor, an experienced and award-winning Technical Communicator specializing in fundraising packages, direct sales copy, web content, press releases, movie reviews and hi-tech documentation.

He has worked as a Technical Writer for Fortune 100 companies for the last 7 years.

In addition to being an Ezine Articles Expert Author, he is also a Senior Member of the Society for Technical Communication (STC), and a Member of American Writers and Artists Institute (AWAI).

He is dispensing million-dollar plot ideas on a daily basis at his screenwriting blog SCRIPT BOILER (http://scriptboiler.blogspot.com).

You are most welcomed to visit his official web site http://www.writer111.com for more information on his multidisciplinary background, writing career, and client testimonials.

While at it, you might also want to check the latest book he has edited, PRIVATE TUTOR FOR SAT MATH SUCCESS 2006:

http://www.lulu.com/content/263630

Share This