Loan Type Select One Purchase Home Equity Refinance Debt Consolidation FHA/VA State Select a State Alabama Alaska Arizona Arkansas California Colorado Connecticut D.C. Delaware Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming Credit Rating Select One Excellent Good Fair Poor View Privacy Policy

Two Loans For One Hundred Percent Financing Staff - Mortgage Lenders Plus.com

The creative financial institutions writing loans for mortgages today have come up with a number of “no down payment” schemes. The target market is generally young people with good incomes and no savings who can afford the monthly payments but can’t come up with a lot of cash up front.

With the lightening-bolt leap in housing prices few home buyers – especially first time home buyers – have a twenty percent down payment in the bank. Twenty percent down is the magic number, whereby the purchaser avoids having to buy mortgage insurance. All home mortgage lenders insist that until the loan reaches 78% of the home’s appraised value you must pay for mortgage insurance, which insures the lender against a default. If you’re going into a home with no down payment, you’ll be paying on that insurance policy for a while. One of the methods used in avoiding mortgage insurance and still keeping the down payment low is the piggyback loan.

The practice involves taking out an eighty percent mortgage and then another, “piggyback loan” to pay for whatever portion of the down payment the buyer needs to get to twenty percent. In many cases, the piggyback loan is for all twenty percent and all the buyer needs to get into these two loans and the home is closing costs on the mortgages.

Thus for no down payment the borrower has a home and two loans. Ironically, often both loans are from the same institution. The requirement from the home mortgage lender for mortgage insurance has forced the buyer to take out another loan from the lender, usually with different terms. Some lenders will provide the option of a fixed rate or variable rate mortgage, with the piggyback loan being provided as a home equity line of credit with a variable interest rate. Just how the borrower achieves instant equity on a no down payment purchase is something of a mystery, but providing the second loan as a credit line is common practice.

Working upwards from the no down payment, one hundred percent financing scenario are 80-10-10 mortgage deals, and 80-15-5 arrangements. These figures denote mortgage plans in which the lender makes a ten percent down payment and borrows ten percent, or where the lender puts down five percent and the piggyback loan is fifteen percent of the sales price.

In many cases, the combined payments on the two loans is cheaper than a mortgage that’s eighty five or ninety percent – or more – of the purchase price along with the mortgage insurance. What the borrower gets out of this is a house with no down payment and plenty of deductible interest since he’s paying on two loans. What he also gets is a good deal of financial uncertainty.

He may be looking at some interesting financial scenarios if, for instance, the mortgage is a 5/1 ARM that adjusts to full interest and principal in five years. At that point, the borrower has two variable rate mortgages in hand on a house that he moved into with zero equity. If the housing market is in the doldrums, it’s quite possible that the no down payment scenario can put a borrower in a position where he owes more on the house than it’s worth – particularly if he opted for an interest only ARM as his principal mortgage.