Second trust loans, also known as piggyback loans, have become a popular way of coming up with a 20 percent down payment on a home if you can’t produce the entire amount. Twenty percent down is the amount required in order to avoid paying private mortgage insurance (PMI).
Here’s how a second trust loan works: You come up with a portion of the 20 percent down payment -- at least 5 percent and, more often, 10 percent. You also get a mortgage for 80 percent of the cost of the home. At the same time, you get a second trust loan to pay for the rest of the down payment.
You’ll have two loan payments each month. But, with a relatively low interest rate, the monthly payments for the second trust loan are usually less than monthly PMI payments. Additionally, because the second trust loan is a type of mortgage, the payments may be tax-deductible. Contact a tax adviser to be certain.
With a mortgage plus a second trust loan, you are carrying more debt than you would be if you could have come up with a 20 percent cash deposit. And, you could be repaying the second trust loan longer than you would be paying PMI. In most cases, your lender or mortgage servicer must cancel private mortgage insurance after you have paid 22 percent of the amount you borrowed.
Second trust loans have pros and cons, so study your options carefully before signing.