80-20 mortgages: No money down without
PMI |
| |
| Second loan,
higher rate
Except in unusual cases, the interest rate on the piggyback
loan is higher than the rate on the first mortgage. But the combined payment usually
costs less than a loan of greater than 80 percent of the home's value, plus mortgage
insurance. This is especially true if the homeowner itemizes deductions on federal
income tax, because mortgage interest is deductible but mortgage insurance is
not.
"It pretty much comes out
to a straightforward mathematical evaluation," says Bob Walters, divisional
vice president of Quicken Loans. You merely compare the cost of an 80-20 piggyback
loan with a loan that includes mortgage insurance. The piggyback loan usually
costs less each month. Lenders structure 80-20 loans
in many ways. At Hsieh's HomeLoanCenter, the first mortgage generally is a 5/1
ARM -- a loan with a fixed rate for the first five years, and which adjusts annually
after that. The piggyback loan is a home equity line of credit that changes with
the prime rate. These loans, Hsieh says, are designed to be refinanced in three
to five years. With Countrywide Home Loans, the 20-percent
piggyback is always an equity line of credit pegged to the prime rate, and the
80 percent first mortgage can be a fixed-rate, adjustable-rate or interest-only
loan. Pros and cons
The 80-20
loans have their pros and cons, says Vijay Lala, senior vice president of product
development at Countrywide. "The pros are that you can get into a home with
almost no money down," he says. "You just have to have your closing
costs, and you can get your payment as low as possible with the interest-only
feature." The main drawback is a biggie. If the house
loses value -- a possibility in overheated markets where these loans might be
especially tempting -- the owner ends up owing more than the house is worth. That
becomes a problem if the owner needs to sell the house or wants to refinance the
loan. In such a case, the owner has to come up with cash to repay the loan in
full. An 80-20 loan isn't just for the cash-strapped borrower.
Some home buyers have ample down-payment money, but the money is invested and
they don't want to liquidate it. "For relatively wealthy
people, it's a cheap way of borrowing money at these low interest rates,"
says Diane Saatchi, who deals with plenty of wealthy clients as regional vice
president of the Corcoran Group in the East Hampton, N.Y. | 
