Home Equity Loans and Lines can be used can be used for two purposes. A Home Equity Loan is typically a fixed rate of interest with a fully amortized payment schedule. A Home Equity Line or HELOC will typically have a lower rate and you have the option of an interest only payment monthly, or you can pay extra to pay down principal.
Avoiding PMI Insurance
With a purchase transaction they are commonly referred to as a "Piggyback Loan" Let’s say for example you are looking at a 10% down payment. We can structure your lending as an 80-10-10. The first mortgage would be at 80% LTV and the second mortgage would be 10% LTV bringing it to a Combined Loan To Value or CLTV of 90% with the 10% being your down payment. By doing this you can avoid PMI Insurance on the first mortgage loan because it is at 80% LTV. PMI Insurance is required on any first mortgage loan that exceeds 80% LTV. With the rising costs of Monthly PMI this may be a more attractive payment schedule. This also works well with today’s low rates. The idea would be to pay down the second mortgage and be left with an attractive rate on your first mortgage loan with no PMI.
Avoiding a Jumbo Loan
Piggyback Loans can also be used to avoid a higher rate, Jumbo Loan product. You would have the first mortgage loan at 417,000.00 which is the max allowable loan size for Fannie and Freddie with the balance on the second mortgage loan or line. This would allow you to take advantage of the lower Conventional Mortgage rates associated with Fannie Mae and Freddie Mac loans.
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Tapping into Your Home Equity
This may be a great option to pay off credit cards or have access to funds for needed repairs on your home. Rates with Home Equity Loans are much lower than credit cards. You can also open a line of credit and have emergency access to cash. You are only billed interest on the outstanding balance just like a revolving charge account.