Real estate financing can be confusing—especially when you're trying your hardest to secure a mortgage that doesn't require the strictest terms and conditions or a heavy down payment.

But did you know that there's a way to stretch the limits of conventional loan structures without breaking them? That's where piggyback loans come into play.

Don't be fooled by the unconventional name; a piggyback loan is a serious financial tool that could potentially enable you to land your dream home with fewer restrictions than you thought possible. 

Let's take a closer look at this strategic, flexible solution.

Understanding Piggyback Loans

Before we jump into the benefits of a piggyback loan, it's best to get a quick understanding of how they work first. 

See, traditionally, a homebuyer would secure a single mortgage to cover the cost of their new home, with the expectation of making a down payment, usually 20% of the property's value (depending on the program they secure).

But a piggyback loan lets borrowers reduce or even eliminate the need for a substantial down payment. How? Because, as the name suggests, this type of loan is actually two loans taken out simultaneously to purchase a home.

The primary loan generally covers 80% of the home's value, while the secondary loan covers a portion of the remaining cost—whether it's 5, 10, or 15%. 

That means borrowers can reduce their down payment to 5% without incurring costly penalties such as private mortgage insurance (PMI).

Benefits of Piggyback Loans

Piggyback loans may appear complex, but they're packed with benefits that make them a smart choice. Here's how this unique financing strategy could benefit you.

Bypassing PMI

One of the biggest advantages of a piggyback loan is the potential to bypass PMI. Typically, if a borrower can't offer a 20% down payment, they will have to obtain PMI. While this reassures and protects lenders in case the borrower defaults, it adds additional costs to the overall loan. 

For example, let's say that a borrower purchases a home worth $1,000,000. With PMI, a borrower might have to pay up to 1% of the total loan amount per year. That's potentially $10,000 annually.

 By leveraging a piggyback loan, borrowers can avoid this expense, leading to significant long-term savings.

Lower Down Payment

Piggyback loans also pave the way for a potentially lower down payment—which can be a significant hurdle for many borrowers. These loans can significantly reduce the amount needed for a down payment or eliminate it altogether, thus liberating capital for other uses.

By using the second loan to cover a part of the down payment, borrowers are left with a much smaller amount to pay upfront, thus liberating capital for other uses. 

It could mean the difference between delaying homeownership and being able to secure a home sooner. And it could also allow borrowers to reinvest funds into their businesses or diversify their portfolios rather than tie up their wealth in a single asset.

Lower Interest Rates

While it might not seem like it, piggyback loans tend to yield lower interest rates over time when compared to taking out larger traditional mortgages.

Even though the second loan in a piggyback loan structure often carries a higher interest rate than the primary loan, the amount is smaller and can be paid back more quickly than the primary one.

And since the primary loan accounts for 80% of the home's value and falls within the conforming loan limit, it often qualifies for a lower interest rate.

Quicker Equity Build-up

Perhaps one of the most overlooked benefits is the potential for quicker equity build-up due to the unique structure of a piggyback loan. 

Initially, your monthly payments may be higher, but there's a silver lining. Once you've paid off the smaller secondary loan, your overall mortgage balance decreases, paving the way for quicker equity accumulation.

For example, the secondary loan arrangement may have a 15-year term versus a 30-year one like traditional mortgages. By effectively clearing the secondary loan in half the time of a standard mortgage, you're building equity in your home at a faster pace.

This faster build-up of equity not only means you own a greater share of your home sooner, but it also offers long-term financial benefits, potentially including the ability to tap into your home's equity for other uses.

Potential Tax Benefits

Finally, potential tax advantages cannot be overlooked. Depending on the borrower's tax situation, the interest on both loans may be tax-deductible, creating an advantageous tax scenario.

It's crucial, however, to consult with a tax professional or financial advisor for accurate information tailored to your specific circumstances, as tax laws and benefits can vary.

Final Thoughts 

While piggyback loans are an innovative and flexible tool in the hands of those who understand the importance of personalizing financial strategies, it's important to remember that they're not for everyone.

If you want to secure a piggyback loan, you need to start by choosing the right partner—that's where Modern Day Lending shines. Our team of expert professionals understands the intricacies of these types of loans and the particular challenges that self-employed individuals face. 

Our goal is to understand your unique financial landscape and customize a lending solution to suit your needs. With us, you can expect a tailor-made approach, comprehensive guidance, and unwavering support.

Here's what you'll need to get started:

• A year-to-date profit and loss statement balance
• Two years' worth of personal tax returns
• Two months' worth of personal asset statements
• Two years' worth of business tax returns (If applicable)
• A driver's license

If you want more information about piggyback loans, please reach out to one of our experts.

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