 Using
a piggyback mortgage
|  Dear
Dr. Don,
My husband and I are currently buying our first
home. The price of the home is $515,000 and we are doing a no-money-down
transaction with a 6 percent seller's concession, which brings the
mortgage to about $545,000. The home appraised for $575,000. I want
to make the right decision. The interest rate is 7 percent on the
first, and about 9 percent to 10 percent on the second. The mortgage
is split into two since we did 100 percent financing. We were told
this is the only way to make this transaction work.
Anyway, my questions are: Do we have any leverage
at all since the home appraised for so much more? And can this benefit
us at all? Even if not now, I was hoping in the next six months
or so. We haven't closed on the home yet and I am a bit nervous
so I want to make sure that we go about things in the right way.
The mortgage payment is going to be quite high
and I was looking to see if there will be any relief to look forward to. I think
that all we have going for us is that the home appraised for so much higher. Will
this help?
Please help me. I am so scared of getting into
the wrong thing. What is the difference between a home equity loan
and a home equity line of credit? Will these things be something
I should look into? Or is there something that I can do with the
loan now prior to closing. Thank you.
-- Heather Home Buyer
 Dear
Heather,
The split mortgage is also called a piggyback
mortgage. You take out a second mortgage at the same time you take
out the first so you can avoid paying private mortgage insurance,
or PMI, on the first mortgage. When you don't put any money down,
the second mortgage holder is taking on additional default risk,
so the mortgage rate on that loan is higher than on a second mortgage
where the home buyer has made a down payment. At this price level,
with no money down, a piggyback mortgage is likely to be your best
choice for financing.
Lenders use the lower of purchase price and appraised value in determining
loan-to-value on a home purchase. You aren't going to be able to
use the fact that the appraised value is greater than the purchase
price as a substitute for you making a down payment -- at least
not in the initial purchase of the home.
If you're looking for some relief, refinancing the
second mortgage down the road will allow you to realize any appreciation
in your home's value as your equity in the property without requiring
you to refinance both mortgages. It makes financial sense to wait
out a prepayment penalty period on the loan before refinancing the
second mortgage.
Home equity loans and home equity lines of credit
are the two different types of second
mortgages. The home equity
loan has a fixed interest rate and a self-amortizing payment, meaning
that the monthly payment covers both principal and interest. The
home equity line of credit, or HELOC, is an adjustable-rate note
that has an interest-only payment, at least in the early years of
the note. If money's tight, the HELOC can reduce your monthly nut,
but you take on the risk that its adjustable rate continues to march
higher, at least until the Federal Reserve stops raising its targeted
Federal Funds rate.
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