Many financial terms can be confusing for homeowners, which can make it tough to find the best home loan for your needs.
Loan terms like piggyback loans, home equity line of credit (HELOC) and home equity loans can be overwhelming to understand and compare. Learn how to differentiate between these loans and discover which might be a good fit for you.
What is a piggyback loan?
A piggyback loan is an additional loan after the first mortgage used to pay for a property or home. It is usually used to lower the initial costs of mortgage, such as the cost of private mortgage insurance (PMI) or a down payment.
When might a piggyback loan be worth considering?
A piggyback loan might be worth considering if you intend to pay back your home equity line of credit (HELOC)or second mortgage in a relatively short period of time. For instance, if you have proceeds coming from the sale of a house, a bonus coming from work or proceeds from an investment, it could be a smart financial move.
A piggyback loan could enable you to keep your longer first mortgage at the balance you want and flex the piggyback for a short period of time.
When would a piggyback loan cost more than paying PMI on a conventional loan?
A piggyback could cost more than paying PMI if you elect to only make interest payments, which could leave a large principal amount in the form of a balloon payment. In a market where home values are increasing it might be possible for you to remove PMI for the cost of the appraisal.
Are piggyback loans seeing any kind of comeback as home prices have risen more dramatically than usual?
No, piggyback loans have not made a significant comeback mostly due to the fact that the housing agencies place loan level pricing adjustments (LLPAs) on the first mortgage when a customer is using a piggyback or subordinate financing. These LLPAs can increase your first mortgage rate by as much as a quarter of a percent which makes you pay additional interest over the long run.
HELOC and home equity loan
A HELOC falls under the home equity loan umbrella allowing you to have a revolving source of funds to draw from as you need it, and as a lender sees fit, and repay at a variable interest rate. A variable interest rate means your rate is subject to change, making establishing a set budget a bit tricky.
Additionally, a lender will look at the value of your home, the equity in it and your credit history. This line of credit is typically used for larger expenses or ongoing home improvement projects or remodels, kids’ college expenses or to purchase a vacation home.
Why would someone choose a HELOC over a home equity loan as a piggyback loan?
You could choose a HELOC over a home equity loan if you intend to use it and pay it back frequently or only utilize a small portion of the credit line. You only have to pay interest on the amount of the line of credit you actually use.
Why would someone choose a home equity loan over a HELOC?
You could choose a home equity loan over a HELOC if you want to lock in the interest rate and have a regular repayment schedule with an expected payment amount. It provides interest rate stability and can also be easier for you to budget.
Typically, a great way to pay for home improvements is through a HELOC or a home equity loan, as they usually provide lower interest rates than credit cards or personal loans. Since property values are up across the country, this could be an excellent way to leave your existing first mortgage in place while leveraging the equity for your home improvements.
Will the housing market slow down with mortgage interest rates on the rise?
The desire to buy a home is still relevant and not necessarily driven by interest rates. It is expected interest rates will continue to rise this year along with the cost of rent, which makes consumers pause and think about which option is the best financial decision for them. Homeownership has proven to be a solid financial investment through all economic times. If you are ready for the investment, explore the market and talk with a banker about how to achieve your goal of homeownership.
What should homeowners consider carefully or even avoid before committing to tapping into their home equity on a paid-off home?
Homeowners would need to evaluate their circumstances to determine the best way to access cash from their home. You should ask yourself the following before taking out a loan:
- Is this a one-time cash need or will you need future advances?
- What repayment term and payment are you seeking?
- Are you comfortable with variable interest rates in a rising interest rate environment?
- Are you seeking interest only or a traditional payment schedule?
No matter if you are ready to make improvements to your home or buy a new home, talk with your financial partner to determine which option is best for your goals and explore the different interest rates that can impact your repayment.