A 100% second mortgage is generally a term used to refer to the use of a “piggy back” loan that provides the funds for a 20% down payment. Today’s housing prices preclude the possibility of coming up with a 20% down payment for many borrowers. However the 20% down payment has long been a traditional benchmark in the mortgage industry. If you can do it, you will qualify for a fixed rate thirty year mortgage at the best available rates – provided your credit is good. Fixed rate loans have traditionally not been an option for borrowers who seek a loan for anything more than 80% of the home’s sale price.
The solution for those who have nothing whatsoever to put towards the down payment is a 100% second mortgage. This is the piggyback loan that lending institutions developed to make mortgages available for people with good cash flow but no savings. The primary mortgage is usually a thirty year note for 80% of the home’s value, at a fixed rate if you wish. The second mortgage will be for 20% of the home’s price; for a shorter period of time and at a higher interest rate than the base mortgage. These loans may run from five to fifteen years and may exceed the primary mortgage interest rate by two or three percent.
A 20% down payment will also eliminate the requirement for personal mortgage insurance (PMI). This addition to the monthly bills is an insurance policy that protects the lender from loss in the case of loan default. People who buy a home with a down payment of less than 20% are required to carry this insurance until such time as they have developed equity in the home equal to 20% of its appraised value. While PMI qualifies for the same tax deduction status as the mortgage interest, nevertheless it can be an additional 100$ or more per month for several years.
A piggyback loan creates a lot of debt and for that reason, only certain individuals or couples will qualify for this type of 100% financing. Most lending institutions have an internal rule about how much total household debt is acceptable for their mortgage applicants. While this rule has varied – or in some cases been ignored – in recent years, generally the lender wants to see less than 40% of total household income devoted to debt service. That includes the home loan or in the case of a 100% second mortgage, both home loans. People who are attempting to put this type of financing together need to minimize credit card debt and perhaps even pay off a car before approaching the bank or broker about buying a home with a 100% second mortgage.