Piggyback Mortgage Explained
Piggyback mortgages can serve several purposes. Some piggyback mortgages are allowed to help a borrower with a down payment. Generally, most borrowers will only have the capacity to take on one or two additional piggyback mortgages since all of the loans are secured with the same collateral.
A piggyback mortgage can include any additional mortgage loan beyond a borrower’s first mortgage loan that is secured with the same collateral. Common types of piggyback mortgages include home equity loans and home equity lines of credit.
Down Payment Mortgage
Down payment mortgages are a type of piggyback mortgage that gives a borrower funds for a down payment. Second mortgages are typically only allowed when they use funds from a down payment assistance program. All sources of down payment funds used in securing a mortgage are required to be disclosed to the first mortgage lender. Generally, second mortgages from many alternative lenders are not allowed since they are beyond the parameters of the first mortgage’s terms and greatly increase the default risks for a borrower. Down payment assistant mortgages may also be known as silent second mortgages.
Home Equity Line of Credit
A home equity line of credit is a revolving credit account that provides a borrower with greater spending flexibility. This type of credit account has a maximum credit limit based on the borrower’s home equity. The account balance is revolving which means borrowers control the outstanding balances based on their purchases and payments. A revolving account will also be assessed monthly interest which adds to the total outstanding balance. In a home equity line of credit, borrowers receive a monthly statement detailing their transactions for the period and a monthly payment amount they must pay to keep their account in good standing.
Home Equity Loan
A standard home equity loan is a non-revolving credit loan. In a standard home equity loan, a borrower can receive the equity value upfront as a lump sum principal payment. The loan will then typically require monthly installments based on credit terms customized by the lender. Borrowers use a home equity loan for various purposes including college costs for their child, home improvements, debt consolidation or emergency capital expenses.
Generally a borrower can only get a second mortgage using a subordinated piece of collateral when that collateral has home equity. Home equity is primarily a function of the value that a borrower has paid on their home. It is calculated as the home’s appraisal value minus the outstanding loan balance. Many borrowers find themselves in an underwater mortgage in the early phases of a mortgage loan repayment since the property can decrease in value and the mortgage balance has not yet been substantially paid down. If a borrower does have home equity in their home, they have a couple of options for a second mortgage home equity loan. These second mortgage products include either a standard home equity loan or a home equity line of credit. Both a home equity loan and a home equity line of credit are based on the available equity in a borrower’s collateral.
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