Achieve Financial Flexibility with Piggyback Loans: A Comprehensive Guide
What is a Piggyback Loan?
A piggyback loan is a unique financing strategy often used by property buyers to achieve more favorable loan terms and financial flexibility. It could encompass combining a construction loan with a permanent loan commitment or involving multiple lenders in one mortgage.
Types of Piggyback Loans
Combination of Construction Loan and Permanent Loan Commitment
In this scenario, a borrower can lock in an attractive loan rate for the long term while still under the construction phase. It provides peace of mind amid fluctuating interest rates.
Example:
Let’s say the permanent lender issues a commitment at a favorable rate of 8%, effective upon the completion of construction. This rate is secured even if interest rates were to drop at a later stage. The commitment is thus ‘piggybacked’ onto the construction loan, ensuring it must be activated right when the construction loan is replaced.
Mortgage Held by Multiple Lenders
In this arrangement, a property buyer may source funds from different lenders. Such subdivisions typically prioritize one lender over others and can help avoid Private Mortgage Insurance (PMI).
Example:
A homebuyer secures a loan amounting to 90% of the property value. Out of this, 80% is provided by a savings and loan association and the remaining 10% comes from a private lender. In case of a foreclosure, the savings and loan association holds the priority. This setup is advantageous in that it allows the borrower to avoid PMI via a piggyback loan.
Related Concepts
subordination
In piggyback loans, subordination refers to the structured precedence where one lender’s rights are subordinate to another’s, thus defining the order of claims and repayment during defaults or foreclosure.
Private Mortgage Insurance (PMI)
This is insurance typically required by lenders when the buyer’s down payment is less than 20% of the home’s total value. A piggyback loan can help avoid PMI, thus reducing monthly mortgage payments.
Frequently Asked Questions (FAQs)
What is the primary benefit of a piggyback loan?
The main advantage is financial flexibility and potential savings. You can avoid Private Mortgage Insurance (PMI) requirements and often lock in favorable rates for permanent loans.
Are there any risks associated with a piggyback loan?
Yes, however, the key risks include potential complexities in managing multiple loans and the requirement that all subordinating loans be repaid if the primary loan defaults.
Can a piggyback loan be refinanced?
Yes, although refinancing multiple loans could be more cumbersome than a single loan, it is indeed possible depending on the circumstances and conditions set by your lenders.
Do piggyback loans require higher credit scores?
Generally, yes. Lenders often prefer borrowers with higher credit scores for piggyback loan arrangements due to the additional risk management involved.
Can I use a piggyback loan for investment properties?
While it is possible, it is often more common for owner-occupied residences. However, specific terms can vary based on lender policies.
Related Terms: Loan Commitment, Subordination, Private Mortgage Insurance, Mortgage Banker, 80-10-10 Mortgage
