When 2 loans are cheaper than 1
The return of 'piggyback' loans may be good news for buyers seeking low down payments and less-cumbersome interest rates.
© Alex Stojanov/Alamy
When buying a house, some people are going through double the trouble — getting two conventional loans instead of one jumbo mortgage.
The practice, often called "piggybacking," helps buyers avoid the higher interest rates and larger down payments that typically come with jumbo loans, or mortgages for more than $417,000 in most parts of the country and $625,000 in high-cost areas. (Bing: What's a high-cost area?)
Piggybacking was popular in the mid-2000s before the mortgage crisis, and it received some of the blame for facilitating home purchases with no or little money down, says Randy Carver, president of Mentor, Ohio-based Carver Financial Services, which provides financial planning for high-net-worth individuals. While more lenders have allowed piggybacking lately, some say it may be more cost-effective to get a jumbo loan because interest rates are at historic lows.
Jumbo-mortgage rates were as much as 0.875 percentage points higher than conventional, or "conforming," rates a year ago. Now, however, the 30-year jumbo rate is 3.79%, and the 30-year fixed conforming rate was 3.59% for the week ending May 3, the Mortgage Bankers Association says.
"The differential in interest rates has narrowed in the last few months," says Tom Wind, executive vice president of residential lending at EverBank. Therefore, the cost-saving potential for two loans has disappeared for most borrowers, he added.
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With so little disparity in interest rates, buyers must factor in the added expense of two sets of closing costs and how long they plan to own the home to see if two loans will save them money or cost them more, Carver says. In addition, not all lenders will permit two mortgages on a new-home purchase, and that may not be allowed when buying a second home or investment property, he says.
EverBank will only finance a primary mortgage, though it will consider loans where the borrower obtains a second mortgage from another lender, Wind says. If the second mortgage or home-equity loan has an adjustable rate, homebuyers may see their payments increase if the economy strengthens and interest rates rise, he added.
"If you can lock in one 30-year fixed rate, a jumbo mortgage may be really attractive right now," Wind says.
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Higher costs involved
Getting two loans may have higher costs. The second mortgage may have lower closing costs, but if it is paid off early, some lenders may require a buyer to pay deferred fees, further reducing any cost-savings, Wind added.
A loan of more $1 million may also require two appraisals, says James P. Mack, vice president of retail sales at Michigan Mutual, which makes mortgage loans up to $2.5 million in 30 states. Because of the risk associated with larger jumbo loans, appraisals are highly scrutinized to determine the loan-to-value ratio, the amount of the loan compared with the value of the home. Ideally, home value is close to the purchase price, but it may not always be the same as the appraised value in a stressed housing market.
Borrowers can obtain financing of as much as 80% LTV, but the "sweet spot" for jumbo pricing is at 65% LTV or less, Mack says.
"High loan-to-value jumbo loans are not out there," he says. "Someone with an 85% to 90% loan-to-value ratio will need a second-mortgage product if they can find one to do their financing."
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When weighing whether to have one jumbo-mortgage loan or combine a conforming loan with a second mortgage or home-equity loan, borrowers should also consider the following:
- Run all the numbers. Homebuyers should carefully read a mortgage lender's disclosure statements and compare costs side-by-side for two loans or a single jumbo, Carver says. "You can see all the numbers if you take the time to read the good-faith estimate," he says.
- Consider future financial needs. A second mortgage at the time of a home purchase can limit a homeowner's ability to qualify for a home-equity line of credit later, Wind says.
- Weigh the best use of your cash. Some homebuyers may want the lower monthly payments or lower down payment of two loans because they see a larger return on their dollars through other investments, Mack says.
The bank is NOT your friend.
Players only love you when they're playing.
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