Piggyback Mortgages Let You Tap Your Home Equity When Buying
A “piggyback” loan is usually defined as any type of second loan that’s closed at the same time as your first mortgage. The piggyback may be a traditional second mortgage known as a home equity loan, a home equity line of credit or some combination of a loan and a credit line.
Piggybacks serve various purposes
Homeowners take out piggyback loans for a variety of reasons when they purchase their home or refinance their mortgage. Many buyers use piggybacks to avoid mortgage insurance that’s required with a down payment of less than 20 percent of the purchase price of the house. Others may want to repair or remodel their home, buy a vacation home or new vehicle, fund a college education or meet major medical expenses.
A home equity loan is the usual means to avoid mortgage insurance or borrow a set sum of money for a long period of time, while a home equity credit line is useful to meet variable or relatively short-term financial needs.
Loan offers predictability; line offers flexibility
A piggyback loan typically has a fixed term and interest rate, though some loans have adjustable interest rates. Fifteen-year terms are common, though five-year, 10-year and other terms may also be available.
A piggyback credit line typically has a term of 15, 25 or 30 years and a variable interest rate. Unlike a loan, a credit line usually doesn’t have a fixed balance, but rather can be drawn upon at need and paid off at will during the term. Some credit lines allow you to convert a chunk of debt into a loan with a fixed interest rate and term.
Some lenders offer very low short-term “teaser” rates on credit lines as an inducement to homeowners. If youre considering a credit line as a piggyback loan, be sure to consider not only the teaser rate, but also your ability to repay the debt when the rate increases after the low teaser rate expires.
The interest on a piggyback loan or credit line may be deductible as home loan interest expense on your income tax return. Consult a tax adviser to find out whether that benefit is applicable to your individual situation.
Loan products can be complicated, so it’s very important to be sure you understand how your loan is structured.
Be wary of high fees on piggyback borrowing
Piggyback loans and credit lines typically are offered with very little or even no closing costs, so be wary if closing costs or fees seem excessive. Some credit lines require a minimum balance or come with an annual or per-transaction fee.
The maximum amount you’ll be able to borrow will depend on the value of your home, the balance on your first mortgage, your credit history and other factors. Home equity loans and credit lines can be cheaper than other types of debt, but you could lose your home if youre unable to repay your debt.