Piggyback Loans: Pros and Cons- By: M Shane

Description : If you want to qualify for a better home, you may be considering a “piggyback” loan. This is a loan that you take out in addition to the primary home loan that you qualify for. A piggyback loan can qualify you for more home than you would otherwise be able to get financing for. It can also help you avoid mortgage insurance requirements.

With a piggyback loan, you can usually qualify for a lot more home than you otherwise would, which is good if your qualification doesn’t allow you to aim for a home that can accommodate a bigger family or that is in a good neighborhood. It may be worth the extra money to get your children into a better school or live in a safer area.

Many potential homeowners have been discouraged from the home hunting process by the 20% down payment requirements for a standard mortgage versus having to pay mortgage insurance. Another thing that a piggyback loan can do for you is eliminate the need for mortgage insurance. Mortgage insurance is a safeguard that most lenders require, which protects them (not you) in case you default on a mortgage loan. It can end up being very expensive for the home owner, up to several percent of the overall mortgage loan. In many cases, a piggyback loan is much cheaper.

Of course, this means that you have two loans you need to pay off and the second mortgage is likely to have a much higher interest rate than the first (main) mortgage. This can push your home payments higher than you anticipate especially if the second loan is for a substantial amount.

Another issue with many piggyback loans is the balloon payment that many lenders expect at the end of the term. A balloon payment is a significant sum that must be paid in full upon the agreed-upon date of loan termination. It is usually quite a bit larger than the standard payments you have been paying up until the end of the loan. Loans arranged like this can catch the average homeowner unawares, leaving them in danger of defaulting if the money cannot be found.

A piggyback loan can also put the homeowner in danger of being unable to find an additional mortgage or home equity loan if an emergency were to arise or improvements on the home are desired. While this may not be a concern today, in the coming years, an additional mortgage loan may be useful, so some thought is required before taking steps that may close that door.

Piggyback loans may solve some initial problems that you can have buying your first home. The question of money is something that every home owner has to figure out for themselves. Educate yourself so that you make the best financial decision possible for your situation.

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