Piggyback loans

Asked by Jennifer, San Mateo County, CA Tue Apr 7, 2009

Does anyone know if piggyback loans are still happening much in the current environment? I want to refinance my house with 2 loans so I don't have a jumbo loan in order to get a lower interest rate.

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Yes, we have access to second mortgages, up to a total loan to value ratio of 80% on a single family residence. Rates on the second mortgages are running about 4.5% right now, for the interest only version, or 6.25% for a fixed rate second.
Hi Jennifer, this is a good strategy - provided your blended interest rate is lower than your current rate. There is also the question of what type of 2nd loan is attainable. Let's run through an example:

Let's say you have a \$600K primary mortgage at a rate of 6.875%, and you plan to refinance with a new 1st loan of \$417K at 5.000% and a 2nd of \$183K at 7.250% (this is also a good exercise for individuals looking to know if they should consolidate two loans.)

The first thing to do is add all of the mortgage debt. In this case, it's \$600K.

Then you divide the amount of the primary mortgage (\$417K) by the total debt (\$600K). The result is 0.695. Multiply that by the rate on the primary mortgage: 0.695 times 5.000 equals 3.475.

Do the same with the 2nd. The outstanding amount on the credit line is \$183K. Divide that by \$600K and you get 0.305. Multiply that by the 2nd's rate: 0.305 times 7.25 equals 2.211.

Add those two numbers to get the blended average: 3.475 plus 2.211 equals 5.686. In this example, the hypothetical homeowner is paying a blended average of 5.686% on both mortgages, which is better than the initial rate of 6.875%.

While the numbers above might work out â€œon paperâ€, the other consideration is the type of 2nd you choose. For example, there is about a 2-3% difference between a 10Y fixed to adjustable 2nd (5.95%, 70 LTV, 720+ score) and a 20Y fixed 2nd (8.2%, 70 LTV, 720+ score)

The best way to decide between these two loan type examples is to look at the payment savings derived via a potential refinance and determine if the 2nd could be paid off within the 10Y period of the lower-rate 10Y fixed to adjustable 2nd, if not, it might be more prudent to choose the 20Y.

If you would like to move forward to determine if this refinance strategy is right for you please contact me offline.

Best Regards, Steve

MBA, GRI, ABR, e-PRO, CMPS, RE Masters
REALTORÂ® / Mortgage Banker-Broker / Certified Mortgage Planning Specialist
Your strategy is a good one, as rates are incredibly low on the conforming loans (under \$417k).

Yes, piggyback loans are still available, as long as you have good equity in your home. Most lenders will allow a second mortgage or equity line as long as your total loan-to-value ratio does not exceed 70%. Some will allow that ratio to go as high as 80%, one will allow up to 90%.

Our company is lucky enough to have relationships with some of the smaller community banks and credit unions -- that's how we are able to offer the higher loan-to-value loans that you might not be able to get on your own, or through the big box banks.

Guidelines change constantly, so if you are interested, please don't wait to look into this.
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