If you’re financing a home right now, you may wonder why your AAFMAA Mortgage Services LLC (AMS) Military Mortgage Advisor has brought up the idea of a second mortgage. (Hint: it’s not because they think you should be buying a second house.)
The term “second mortgage” can be used to refer to home equity loans, home equity lines of credit (HELOCs), and piggyback loans. All of these loans are taken out on a property that is already mortgaged or is being financed (purchased).
These products can provide you with a substantial amount of money to make a large purchase, pay off debts, or, as is the case normally with piggyback loans, increase your down payment when combined with a first mortgage to buy a home.
Equity as an Asset
Equity is the current value of your home, less what you owe on your mortgage. In other words, your equity is the portion of your home that you actually “own.” If your home is worth $400,000 and you owe $200,000 on your mortgage, you have $200,000 in equity. A second mortgage, such as the Home Equity Advantage LoanSM by AMS, enables homeowners to tap into their home’s equity and use that money for debt consolidation, home improvements, or other major expenditures or investments.
Because equity is an asset, it’s possible to use it as collateral and turn it into cash — in other words, a second mortgage, also known as a home equity loan.
Related: Cash-Out Refinance vs. HELOC — Which Is Right for Me?
How Do Piggyback Loans Work?
A piggyback loan is an animal unto itself.
Piggyback loans get their name from being “piggybacked” on top of your primary first mortgage.
Why would you want to do this? Let’s say you’re using a conventional mortgage and you’re putting less than 20% down. Having less than 20% equity — how much of the home you own — means the lender will require you to have private mortgage insurance (PMI) — a requirement for smaller down payments. You use the piggyback loan to make or augment your down payment so you’re not paying PMI on your new loan.
For example, you may decide to take out a piggyback loan for 20% of the home’s value. This scenario is known as 80-20, although other combinations are possible such as 80-15-5 where you have a second mortgage equal to 15% of the home’s value and make a 5% down payment.
Pros and Cons
Piggyback loans can come in handy if you want to purchase a home that exceeds the Fannie Mae, Freddie Mac, or FHA maximums for conforming loans, but don’t want to take out a jumbo loan.
However, keep in mind that by taking out a piggyback loan you’re increasing your debt and you'll have additional closing costs to pay. They also typically have higher interest rates depending on your credit score, loan type and other factors.
Also, you would be taking out two loans, which could mean two sets of closing costs and two separate monthly bills. However, the second mortgage is usually on a shorter term and you might be able to pay off sooner to reduce having two payments.It is important to look at all options to determine which mortgage product is best for you.
What’s Right for Me?
Taking out a second mortgage is never an easy decision. Ask yourself: Is having a higher payment and building equity faster more important to you, or is having a lower payment more important?
Either way, you’ll benefit from working with an AMS Military Mortgage Advisor to put the numbers together for you, based on your needs and situation.
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