Piggyback Mortgages are great to avoid paying the monthly Private Mortgage Insurance (PMI) payments which are not even tax deductible. A piggyback is basically nothing more than a second mortgage closed at the same time with the first mortgage in such a way that the share of the first mortgage drops down to 80% of the total loan. A common formula is 80-10-10 in which 80% is the first, 10% is the second (piggyback) mortgage, and the last 10% is the down payment. In many cases, the piggyback is provided as a revolving home equity line of credit (HELOC) to pay for the recurring expenses. Studies show that the number of piggyback mortgages has quadrupled since 2000. However, piggybacks have a couple of drawbacks. First of all, you need a higher FICO (credit) score to qualify for the piggyback (about 680) than for the first mortgage (as low as 620 will do). Secondly, a recent study by Standard & Poor's (S&P) has shown that piggyback loans have a higher default risk than the others. The study examining the performance of 640,000 piggyback loans secured between 2002-2004 has shown that piggyback mortgages are 43% more likely to default than the conventional first mortgages even when one statistically controls for such factors as the FICO score of the borrowers. One reason that immediately comes to mind is the fact that, although the most common 30-year first mortgages have fixed rates, piggyback mortgage have variable interest rates that can zoom up and present an unplanned burden for the borrower. Especially when the piggyback is provided as a HELOC (Home Equity Line of Credit) which is indexed to a floating rate (like the prime rate), the increases in future monthly payments should not come as a surprise. Piggyback mortgages can save you some money upfront but as always buyer beware. Check with your mortgage broker before making your final decision. It may be well worth it to get a copy of the original S&P study and read further on the topic. --------------------------------------------------------------------------------------------- |
