Refinancing with a piggyback loan is tricky, but not impossible

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August 9, 2017 | Updated September 20, 2017


Key Points

3 options for piggyback refinancing

  • Refinance the first mortgage.
  • Refinance only the piggyback loan.
  • Refinance the first mortgage and piggyback loan together.

Twenty percent is a sacred number when it comes to mortgages. Borrowers must have at least 20 percent equity in their home to avoid paying private mortgage insurance (PMI), which covers their lender in case of default. Piggyback loans are one way of sidestepping PMI, but come with several risks and challenges — particularly when it comes to refinancing.

How a piggyback loan works

A piggyback loan is a second mortgage taken out at the same time as your first mortgage. It is typically structured as a variable-rate home equity line of credit (HELOC) covering up to 15 percent of the home purchase price. The piggyback loan takes a second lien position, meaning the first-mortgage lender has the first rights to your home should you default.

Considered part of the down payment, a piggyback loan can help boost the homebuyer’s down payment to 20 percent, enough to eliminate PMI from monthly mortgage payments. Piggyback loans are also useful when purchasing high-value properties that would require a stricter jumbo loan by allowing the borrower to divide the mortgage into two smaller loans.

How to refinance your first mortgage

Ideally, within a few years, a borrower builds sufficient equity in their home while paying off their piggyback loan. That’s the easy route to retaining a first mortgage that can be refinanced as needed.

Paying off a piggyback loan quickly is not always feasible, however. Because there are two liens on the home, refinancing a first mortgage and piggyback loan is challenging.

Theoretically, if you refinance your first mortgage, the second mortgage automatically takes the first lien position. As a first-mortgage refinance lender will not agree to a second lien position for a loan that covers the majority of the home’s value, the piggyback lender must agree to retain its secondary lien position. Many lenders will not accept such an arrangement, as it puts them in a risky position behind a mortgage with a newly reset term.

How to refinance the piggyback loan

Piggyback loans that are HELOCs typically have a five- to 10-year period, where only interest payments are required, followed by a payback period or balloon payment covering the entire loan amount. If you’ve reached the payback period but cannot afford the higher monthly payments or balloon payment, you may want to refinance the piggyback loan by itself.

Refinancing into another HELOC can be difficult. As a borrower, you are taking out a larger variable-rate loan than your original piggyback loan, accruing more interest on top of it. Not only does this make you a riskier borrower, the lender is assuming a second lien position subordinate to your first mortgage.

To qualify for a piggyback refinance, lenders want to see that you can repay not only the interest but also the principal. A low loan-to-value ratio, solid income and strong credit are required.

How to refinance both mortgages together

The most cost-effective way of refinancing with a piggyback loan is to combine both the primary and secondary loan into one primary mortgage. By refinancing your first mortgage to include the value of the piggyback loan, your lender has the first lien on your home and will be more willing to extend lower interest rates.

There are some eligibility requirements, however. Most lenders require that you hold the second mortgage for at least one year before refinancing it into your mortgage. You must also have at least 20 percent equity in your home or you will be required to pay PMI, defeating the original purpose of the piggyback loan. Income, credit and loan-to-value requirements also apply.

Don’t forget that refinancing your first mortgage and piggyback loan together is akin to closing a new mortgage, with all the attendant appraisal and closing costs. You may be able to include closing costs in your mortgage, so be sure to discuss with your lender. While refinancing both mortgages together often offers lower interest rates and monthly payments, it resets the term of your loan, which can result in more interest paid over time.

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