There are several home loan options available to home buyers in today’s market. For many, putting 20% down on a property is not an option, so many home buyers have to look for loan programs that require less than 20% down. These loan programs will require private mortgage insurance also known as PMI. The mortgage insurance increases the monthly mortgage payment, but for some people, there is another option as well.
Some people will consider adding a second mortgage loan. These loans are also called piggy back seconds or purchase money seconds. The advantage of a second home loan is a reduced down payment, no mortgage insurance, and in most cases a reduced total monthly house payment Best Car Finance.
Reduced Down Payment
By adding a second home loan, you are able to have a lower down payment and still avoid mortgage insurance. In order to avoid mortgage insurance, a person must put down 20%, but with a second mortgage loan, you are actually in a sense borrowing a portion of the down payment. Second home loans usually help the client put as little as 5-10% down on a new home.
This is where the term 80/10/10 or 80/15/5 comes from. The numbers represent the loan-to-value ratio compared to the purchase price of the home. The first number is the first mortgage which is usually 80% of the sales price. The second number is the second loan and the final number represents the down payment. For example, if a buyer purchases a house for $100,000 and does an 80/15/5 loan program, then the first mortgage would be for $80,000, the second loan would be for $15,000 and the down payment would be $5,000.
No Mortgage Insurance
By splitting the home loans into two, mortgage insurance is avoided. This can save the homeowner hundreds of dollars a year.
Lower Monthly Loan Payment
For the most part, the monthly mortgage payment is lower when you split the mortgages into two separate mortgages. Keep in mind though, that the second loan will have a higher rate.
Getting Approved For A Second Or Piggy Back Loan
In order to split the mortgages, you must get approved for a second loan. Second lien companies have tougher mortgage guidelines and usually require a credit score of at least 700. Also, the maximum debt-to-income ratio for the purchase cannot surpass 45%.
Finally, several second lien lenders will not do a second mortgage for a first time home buyer. Also, some loan programs, like FHA home loans, do not allow a second lien at time of purchase.
Not everyone will have the ability to split their mortgage loans at time of purchase, so it is important to discuss with your loan advisor all your options when it comes to purchasing a new home.