The Benefits and Dangers of the 80 20 Home Loans
When a buyer takes out a piggyback loan, he or she is really taking out two loans. The main or mortgage loan is for 80% of the home’s purchase price. The second, or piggyback loan is for 20% of the purchase price, minus any down payment. In many cases, the buyer can not come up with a down payment, but can still qualify for an 80 20 loan.
Now although the piggyback loan can help a buyer to obtain a home, while lacking enough money to cover a down payment, that does not mean that those couples who qualify for an 80 20 loan can have bad credit. In fact, they must have good credit. They must show that they have made timely payments on their rent and their monthly bills.
Often such couples can pay their bills, but they find it extremely difficult to save a great deal of money. Yet they want to buy a home now while the home prices are fairly low. They are worried because they anticipate a rise in home prices that would be steeper than any possible increase in one or both of the couple’s salaries.
Such a couple could opt to investigate available mortgage programs. Such programs allow buyers to obtain a house without making a down payment. However, that no money down option is linked to a specific requirement. The buyer must pay the cost of private mortgage insurance. Such insurance protects the lender from the costs that would be associated with any future foreclosure process.
Now lenders usually require payment of PMI whenever the cost of a loan is greater than 80% of a home’s purchase price. However, in the 80 20 loan, the main or mortgage loan does not cover more than 80% of the purchase price. Therefore, the buyer does not have to have a PMI.
By taking out an 80 20 loan, a couple can save money on taxes. They can deduct the amount of money that they have paid in interest. The interest rate on the piggyback loan is higher than the interest on the mortgage loan. A couple that uses a mortgage program, and escapes a down payment in that way, can not deduct the cost of the required PMI.
In addition, the piggyback loan is designed in a way that encourages a refinancing of the home, about three to five years after the day on which it was purchased. However there is a serious catch to this last advantage.
Piggyback loans have become quite popular in areas that might be termed a seller’s market, in other words where homes are selling fast. However, those are the very places where home prices could suddenly take a nosedive. If that were to happen, then the value of the home would be less than what the buyer owed on the home. Consequently, it would be difficult for the buyer to refinance his or her mortgage loan.
Why could that be a problem? Why would it be important for a homeowner to enjoy the ability to refinance a home? Well, by refinancing a home, a homeowner can obtain money that can be spent on improvements to the home. A young couple might want to extend because they are planning to start a family. Alternatively, they might want to purchase a larger home, and to make their present home more appealing to any potential buyers.