How to use a Piggyback Loan to avoid a Jumbo Mortgage or Mortgage Refinance ?
JUMBO mortgage or mortgage refinance (MMRF) loans are loans whose amount exceeds the limits defined annually by housing public sector entities (PSEs) such as Fannie Mae and Freddie Mac. The disadvantage with jumbo MMRF loans is that they are costlier by 1/4 % to 1/2 % than 'conforming loans', i.e. loans that conform to the limits specified by the PSEs. These percentage differences may seem small. But MMRFs are usually long-term loans, so even small percentages work out to substantial a amount over the life of an MMRF loan which could be anything up to 40 years.
In most cases, conforming loans are sufficient, and this is evidenced from the huge demand for such loans. The limits prescribed for conforming loans in 2008 are: $417,000 for single-family home, $533,850 for a two-family home, $645,300 for a three-family home, and $801,950 for a four-family home.
However, there may be situations where you need a higher MMRF loan than the maximum allowed for conforming loan, in which case the thought of a jumbo loan (also called 'non-conforming' loan) comes to mind. However, there is usually a way to avoid a jumbo MMRF loan and yet take a loan of a total amount exceeding the specified limit of a conforming loan. Let's see how.
Suppose you want to buy a one-family home priced $600,000 and that you have to make a 20% down payment (or $120,000). So, the net amount you need to borrow would be $480,000. This is $63,000 more than the limit of $417,000 specified for conforming loans for single family homes in year 2008.
Therefore, ordinarily, you would opt for jumbo loan of $480,000, and end up paying a higher interest rate. But you don't necessarily have to do that. Take a piggyback MMRF loan!
It's simple to understand what a piggyback MMRF loan is. Simply put, it is a second MMRF loan. In our above example, instead of taking a jumbo loan of $480,000, you take a first MMRF loan of $417,000 (i.e. a conforming loan) and take a second MMRF loan of $63,000 (also a conforming loan).
In a majority of cases, the interest you would be paying on the two conforming MMRF loans would be less than that on a single jumbo loan. Thankfully, Fannie Mae and Freddie Mac have also defined limits on second MMRF loans, which is $208,500 for a single family home in 2008 in all states except Alaska, Hawaii, Guam, and the US Virgin Islands (where the limits are 50% higher for both first and second mortgage loans).
Whether you are looking a mortgage loan or a mortgage refinance loan (the two are technically the same), try to avoid taking a jumbo loan. This is because jumbo loans come at a slightly higher interest rate, which works out to a substantial amount over the life of a home loan. Fortunately for home-buyers seeking a loan exceeding the limits prescribed for conforming loans, there is provision for second mortgage or mortgage refinance loans too, within prescribed limits. Thus, piggybacking a second conforming loan on a first conforming loan is the way to avoid jumbo loans. Only if the loan you can get by two mortgages doesn't suffice for your home, should you go for a jumbo loan.