It’s another aftereffect of the rise in housing prices: piggyback
loans in New Orleans are making a comeback. According to a recent American
Bankers Associations Report, the number of piggyback loans originated across
the nation more than doubled within the past year.
A piggyback loan involves taking out two mortgages simultaneously,
with a home equity loan (aka “second mortgage”) ‘piggybacking’ on
a first mortgage. In New
Orleans home purchases, piggyback loans typically come into play when the
buyer is unable to provide a full 20% deposit. Normally this would necessitate
the buyer having to take out private mortgage insurance (PMI), which can be
pricey. By going with the piggyback loan alternative, the Loan to Value (LTV)
ratio can be reduced to less than 80%, the threshold below which PMI requirements
vanish.
A standard piggy back loan is structured as a “80-10-10”—meaning
that 80% of the purchase price comes from the first mortgage, the next 10% from
the second loan, and the final 10%, the deposit.
One major downside to piggybacking is cost. The interest
rates charged on piggyback loans are significantly higher than those for first
mortgages, so it may prove less expensive to pay for PMI for a short period of
time. This is more likely in a rising market, since the Loan to Value can
shrink below 80% before long. Another problem can crop up when it comes time to
refinance. In order to refinance, the second mortgage lender has to agree to
remain in a subordinate position. This agreement (known as re-subordination) may, in some cases, be hard to reach. Lastly, homeowners with a piggyback loan are
unlikely to be able to take out a third loan should they want to access their
home equity. Nowadays, thirds are rarely granted.
Between 2000 and 2006, it made a lot of sense to take out a
piggyback loan. The interest on piggyback loans was tax-deductible, while
mortgage insurance premiums were not. When property prices were rising as sharply
as they were between 2000 and 2006, lenders also considered piggyback loans a
good bet because the growth provided ample equity ‘cushion.’ But when real
estate prices dropped in 2007, piggyback loans fell out of favor. By 2010, the percentage
of piggyback loans fell to just 1.7%.
Today, with house prices on the rise, lenders are again
growing more comfortable granting New Orleans piggyback loans—but with a bit
more caution. Lenders usually ask for a FICO score of at least 700 and a debt-to-income
ratio that’s below 43%. Increasingly, they want to see that a borrower has cash
reserves in case of unforeseen circumstances.
If you are considering a piggyback loan in New Orleans this spring, you will want to run the
numbers to see if it’s the solution that makes the most sense. In some
circumstances, it can be the best way to get into a home you can afford even
though you can’t furnish a full 20% deposit. Call me today to discuss how
today’s market meshes with your needs!
Terez Harris NOLA Real Estate Group
(504)297-2619
Harris.Terez@gmail.com
Keller Williams Realty New Orleans 8601 Leake Ave. New Orleans, LA 70118 504-862-0100
Each office independently owned and operated. All brokers licensed in the state of Louisiana.
No comments:
Post a Comment