During the real estate boom, the piggy back loans were quite popular. When you decide to buy a home and don't have the 20% down payment, you can consider taking out a piggy back loan to fund the down payment. Thus, the result is little or nothing down along with no cost for mortgage insurance. There were many reasons why the Piggyback loan was so popular at one point of time.
Reasons for the popularity of piggyback loans
Let's take a look at some of the reasons for the popularity of piggy back loans:
1. Cheaper option: Piggyback loans were quite popular at one point of time because these loans were comparatively cheaper from the option of mortgage insurance. Though there would be two mortgages, the total payment on both the loans may be less than the payment on one mortgage with private mortgage insurance (PMI).
2. Helps to buy an expensive home: With the help of a piggyback back loan, it becomes easier for many people to buy an expensive home.
3. Interest paid becomes tax deductible: The interest that a home buyer pays on a piggyback loan is tax-deductible. As PMI is not tax deductible, people naturally preferred this option.
4. Easy to get rid off: You can easily get rid of the piggyback loan if you have enough money to pay off the loan. However, it is not the case with PMI. Private mortgage insurance is quite difficult to cancel.
Why is the option less popular now?
The option of piggyback loan is rarely available now. Let's take a look at the reasons:
1. Risky in nature: One of the main reasons for the rarity of such loans is that they are quite risky in nature. If the property is foreclosed, the lender may not be able to recover the piggyback loan at all. The whole sale proceed will go toward the first mortgage.
2. Interest rate is variable: Normally piggyback loans have an adjustable interest rate. Thus, the interest rate keeps on fluctuating with the market situation. There is no such problem with PMI as it remains fixed.
3. Balloon payments: Well, some piggyback loans may have a provision for balloon payments. Thus, at the end of the loan term, the borrower will be liable for paying a lump sum amount as balloon payment. This can be a problem for the borrower.
4. High interest rate: Piggyback loans are available at a high interest rate. This is one of the major reasons why this has become unpopular in the recent times.
The near-disappearance of piggyback loans was long overdue. This option is helpful only when home values are rising. As the risk factor is higher, most lenders have now stopped offering this loan option.