Piggyback loans may be a ticket to foreclosure

Foreclosure rates are much higher for buyers with piggyback loans

The housing market has been enjoying its greatest period ever in the first half of this decade. Housing prices in many parts of the country have reached levels that would have been completely incomprehensible just ten years ago. In some parts of California, houses have literally tripled in value since 2000. That’s great if you own one and want to sell, but it can be a nightmare if you work for a living and need to buy a place to live.

Lenders are sensitive to the needs of their customers as well as their bottom line, so over the years they have introduced a wide variety of ways to help people who might have trouble buying get into the home of their dreams. These loans include mortgages with no down payment, mortgages with adjustable rates or even loans with no payment of principal for several years. In some circumstances, lenders encourage the buyers to take out not one loan, but two. This is known as a “piggyback” loan.

The reason for two loans is this - lenders require private mortgage insurance for loans that exceed 80% of the value of the home. This insurance protects the lender against default by the buyer. But PMI is expensive, the buyer feels that he or she isn’t getting anything for their money, and it’s scarce money that otherwise might be going to other useful places, such as paying for the house. A piggyback mortgage is actually two loans that circumvent the private mortgage insurance. The first loan is a conventional mortgage issued for just under 80% of the value of the home. The second loan is a home equity loan that makes up the rest of the purchase price. It’s a great way to save money and help cash-strapped buyers eliminate their private mortgage insurance.

There is a downside to this, and it’s an ugly one. A recent study shows that buyers with a piggyback loan are 43% more likely to end up in foreclosure than buyers with a single mortgage. Even worse is that buyers with credit scores below 660, which isn’t all that low, have a 50-50 chance of seeing foreclosure.

Unfortunately, those home equity loans tend to have adjustable interest rates, and with rates rising, more and more buyers who didn’t have a lot of spare cash to begin with are finding that their payments on the second loan are quickly becoming unaffordable. In fact, some payments may have doubled in just the last three years. This is leading to a lot of home foreclosures.

If you have a piggyback loan and you have seen the payments increase dramatically on your second mortgage, you might wish to talk to a lender about refinancing. Depending on where you live, your equity situation may have improved to the point where refinancing to a single, fixed-rate mortgage may be a smart thing to do. It’s difficult to buy a house, and there is nothing more heartbreaking than losing your home to foreclosure. You don’t want that to happen. If you are having trouble making your payments, call your lender today.