Piggyback Loans
Piggyback loans were briefly discussed in Chapter 3 in regard to private mortgage insurance (PMI). Some borrowers who can't make a 20 percent down payment may consider working around PMI by taking out a first and second mortgage concurrently.
Typically, a piggyback loan works as follows. The most common type is an 80/10/10, which means that a first mortgage is taken out for 80 percent of the home's value, a down payment of 10 percent is made, and another 10 percent is financed through a second loan at possibly a higher interest rate. Some lenders may allow a piggyback loan for less than a 10 percent down payment.
Many people hire a real estate attorney when they're buying or selling a home, but it's not a bad idea to ask what your attorney would charge to check your loan documents for a future refinance. All mortgage paper-work is a blur to most people, and a good attorney has an eagle eye for restrictive loan covenants and big increases in the fees you might blindly agree to at closing. For a relatively small fee, you could save thousands.
Again, it makes sense to talk with a tax expert about whether it might make more sense to pay PMI. Piggybacks used to be more attractive than traditional loans because mortgage interest on the second loan was tax-deductible, while PMI premiums weren't. But under a new federal law that went into effect in late 2006, PMI premiums became tax-deductible for borrowers who buy or refinance a home in 2007 as long as the homeowner has adjusted gross income of $100,000 or less to get the full deduction.
