Furthermore, when more than one financial
institution is involved in a single transaction, the two loan providers take
less risk. Borrowers with a small down payment have a better chance of
qualifying than they would if applying for a conventional mortgage. At the same
time, the combined rate on this type of loan is usually higher than on
conventional mortgages. The financial institution that finances 80 percent of
the loan may agree to lower the interest rate. The second lender, however,
finances 20 percent or even 5 percent and doesn’t benefit much from lending a
small amount of money. This is why, the second loan provider may offer a higher
interest rate. In addition, piggyback loans usually go with a substantial
balloon payment at the end of the repayment period. The payment can be considerably
larger compared to regular mortgage payments.
Note that this type of financing is extended in
the form of a dual mortgage. Thus, if an emergency were to arise, obtaining a
home equity loan or a second mortgage could be close to impossible.
Borrowers who apply for a piggyback loan should
compare different programs and consider a number of factors. Among these are
monthly payments, interest rate, and the type of interest rate (adjustable vs.
fixed) on the second mortgage. Other important factors are the maximum
loan-to-value limits and the monthly insurance premium. Consider the fees,
penalties, and any qualification limitations that may apply. When doing the
math, keep in mind that you will have expenses such as the closing cost for the
transaction, earnest money, and others.
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