The Piggyback Mortgage

As the name piggyback mortgage suggests, it is a combined credit plan and is basically a procedure utilized by the lenders or creditors to help mortgagors or borrowers steer clear of making private mortgage insurance (PMI) premiums. It may be mentioned here that when the credit sum in any traditional mortgage surpasses 80 per cent of the property's assessed value, the borrowers require paying PMI. In this case, the value of the property is delineated as which ever is lower, the sale price of the property or its appraised value. Earlier, for acquiring a traditional mortgage, it was essential for the borrowers to make a 20 per cent down payment of the value of their property. The norms then were that while the borrower would make a down payment of 20 per cent of the price of their property, lenders - including banks, financial institutions or other private creditors - would agree to provide a loan equivalent to the remaining 80 per cent of the value of the property. The situation has changed over the years and now the creditors and specific insurance firms have formed an alliance to work out a process whereby the lenders are securely able to provide loans amounting to more than 80 per cent of the price of a property. Together the lenders and the dedicated insurance (PMI) firms made an arrangement to enable the latter to provide loans over 80 per cent of the value of a borrower's property by introducing insurance cover for the lenders against any financial losses incurred by them in their business in this process.

According to the arrangement, a borrower is free to take a loan exceeding 80 per cent of the property value provided he or she is willing to shell out the money required for the private mortgage insurance (PMI) premiums. It may be mentioned here that in piggyback mortgage, the borrowers are required to pay lesser PMI monthly premium if they make higher down payments. On the other hand, the premium amount goes up if the down payment is less. The range of the premium on the PMI is also variable - extending from the home owner's insurance fraction of the escrow (property held conditionally) to a sum equivalent or in excess of realty tax segment of the escrow imbursement. Hence, this presents a clear picture of the substantial amount of money a borrower is able to set aside by shopping for a piggyback mortgage.

In other words, the piggyback mortgage or a combo is having two credits on the same property simultaneously. Here is an example to understand the functioning of a piggyback loan better. If a borrower possesses funds equivalent to just five per cent of the down payment value of the new property he or she is looking forward to obtain, they would require a solo loan of 95 per cent of the property's purchase value. In this case, the borrower would have to arrange for private mortgage insurance as the value of the credit surpasses the 80 per cent ceiling set for the PMI. Now presume that two loans are offered to the borrower as an alternative to approving a single mortgage. In such an instance, the first loan or the major credit would be for 80 per cent of the purchase price of the new property, while the second loan or the minor credit would be for the left over 15 per cent of the sales cost. The best part of this dual mortgage deal is the fact that the borrower will not be required to make any PMI payments as the first and main loan is well within the limit of 80 per cent of the total credit on the property. Moreover, the borrower will also enjoy the benefit of income tax deduction for the total interest amount he or she will be paying for both the loans. Therefore, if you are planning to obtain a piggyback mortgage, contact you income tax advisor for necessary actions in this regard.

This was just one instance of a combo or piggyback mortgage and it is possible to have many other situations where a borrower is able to make a down payment of five per cent of the sales value of a property and get it. For instance, a borrower can acquire a mortgage worth 75 per cent of the property sales value as the first or main loan, 20 per cent of the property sales price as the second or minor loan and make a down payment for the remaining five per cent. In another instance, a borrower may have 80 per cent of the property sales worth as the first credit or mortgage, 10 per cent as the secondary credit and make a down payment for the remaining 10 per cent. In fact, getting a combo or piggyback mortgage without making a down payment or deposit is virtually impossible these days. Till recently, many lenders could offer a combination of two mortgages in the proportion of 80 and 20 per cents or 75 and 25 per cents making the total loan amount equal to 100 per cent of the new property purchase value. The lenders who were earlier at ease with arranging for a second mortgage for borrowers who did not make any down payment or initial deposit now do not have the nerve to make such investments keeping in view the potential financial losses to them in the case of a default. The fact remains that while it is possible that many of these lenders may revert to the old method of arranging 100 per cent mortgages without any down payment some time in the future, presently providing a combined loan equivalent to 100 per cent of the property sales value seems to be simply impossible.

Here is a case in point to understand things better. Suppose a property holder has a first mortgage listed against his asset and now wants to have a loan and obtains it from a private party. In doing so, the home owner or borrower enters into a mortgage agreement, which is listed as a second mortgage. It is essential that this legal mortgage document will include a clause that makes it necessary for the borrower or the mortgagor to pay the mortgagee or the lender of the second credit payments every month that he or she was making to the first mortgagee. In turn, the second mortgagee would right away make the same payment to the first lender. As an alternative, every time the borrower makes a monthly payment to the first investor he or she has to make available sufficient proof to the second investor regarding the same. It is also essential that the borrower makes the proof available to the second mortgagee within a stipulated period. To be precise, in this instance, the second investor is all the time on the borrower's back to make certain that there is no outstanding payments to the first investor or the fact that the first mortgagee does not suffer owing to the second mortgage.

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