How to manage your piggyback loan
Got a second “piggyback” loan on top of your mortgage? Here are three options to help you manage your mortgages.

Piggyback loans were designed to avoid private mortgage insurance (PMI) premiums, which are usually required with any mortgage exceeding 80 percent of a home’s value.

In the most common scenario, the homeowner puts 10 percent down, gets a mortgage for 80 percent of the home’s value, and then takes out a second loan for the remaining 10 percent. Although this second loan generally carries a rate one or two percentage points higher, the combined payment on the two loans may be less than one larger mortgage plus PMI. There can also be a tax break — because the piggyback loan is a second mortgage, the interest may be tax-deductible.

If you bought a home with a low down payment and a piggyback loan, you may have questions about how to manage your second loan in combination with your first. Here are three options that can help you do so wisely:

1. Consider accelerating your payments.
Piggyback loans can be structured in several ways. One popular choice is a home equity line of credit (HELOC), which carries a variable rate that is typically higher than a first mortgage. A HELOC usually requires only small minimum payments, but paying it down more quickly can save you thousands in interest over the long run. If you can afford higher monthly payments or a lump-sum prepayment once a year, put those extra funds toward your HELOC rather than your first mortgage.

Other piggyback mortgages are balloon loans, which carry low monthly payments, but require a large lump sum to be paid at the end of a specified term, often five, seven or ten years. Whether it is wise to make prepayments on a balloon loan depends on the interest rate and length of the term. If the loan carries a high rate and will come due within a few years, knocking down the principal with extra payments is usually wise. However, if your rate is fairly low and the loan does not come due for ten years, you may be better of investing your extra money instead.

2. Look for opportunities to refinance.
Since a piggyback loan typically carries a higher interest rate than your first mortgage, you may be able to save if you can refinance to a single mortgage. Even if you still need two loans, refinancing the piggyback alone may also be an option. You’ll need to take several factors into account:

• Local market conditions. An upswing in house prices in your neighborhood may have bumped your equity above 20 percent, making it possible to refinance your two loans into one.

• Current mortgage rates. Obviously, the time to refinance is when rates are lower than when you obtained your mortgage. If the interest rate you currently have is lower than today’s rates, it may not make sense to refinance. However, even if rates have not dropped significantly, you might consider refinancing your piggyback loan to obtain better terms. If you have a balloon loan that is about to come due for example, you may want to consider refinancing now.

• How long you plan to be in your home. As with any refinance, closing costs eat into your savings, so the longer you put off moving, the more sense it makes to obtain a new mortgage.

3. Consider paying PMI.
If interest rates were to start trending upward, a piggyback loan with an adjustable rate could become costly. Compare your current arrangement to the cost of refinancing to a single mortgage with less than 20 percent equity. You will have to pay PMI, of course, but market conditions (as well as a new tax break that makes PMI deductible for some borrowers) may make this the less costly option.

Mortgage tips for people who relocate frequently
Relocating again? Consider these tips for staying on top when you buy and sell homes frequently.

People who relocate frequently have special needs when it comes to financing home purchases, especially in today’s real estate and lending climate.

Two major factors for people who relocate frequently to consider are the terms of an adjustable-rate mortgage, and the tradeoff between loan closing costs and interest rates, said Pamela Hamrick, vice president of operations for LendingTree Loans.

Most adjustable-rate mortgages, or ARMs, have an initial fixed rate that adjusts after a set period. In general, the shorter the fixed-rate period is, the lower the initial interest rate. When the rate adjusts after the fixed-rate term expires, the new rate – and therefore monthly payments — can be significantly higher.

The challenge is in matching the fixed-rate term with the length of time you expect to be in the home before relocating and selling, Hamrick said. If the rate adjusts after three years but you stay longer, you’ll be stuck with higher – and potentially unaffordable – payments.

“If you’re really not sure you’re going to move again, that might not be the way to go,” she said.

New considerations
Until recently, homeowners often refinanced to a fixed-rate mortgage before the rate adjusted upward. But Hamrick noted that tighter lending guidelines mean some people who would have qualified for refinancing in the recent past won’t be able to qualify now.

At the same time, the slow housing market is posing challenges for some workers trying to sell their homes when they relocate, Hamrick said. “If you need equity from that other house to buy a new house, it becomes a challenge if you don’t sell it on time,” she said.

Another thing to consider when relocating is whether a working spouse has a job yet at the new location, she said. Lenders consider “trailing spouse” income during the loan qualification process, but it’s just a portion of the previous earnings. Frequent movers who derive a large portion of income from commissions and bonuses may also be challenged in qualifying for a loan, she said.

Weigh costs carefully
People who relocate frequently also need to carefully weigh loans that have no or low closing costs versus those that charge traditional closing costs, Hamrick said.

Loans that don’t charge points at closing – each point represents one percent of the total loan – generally carry a higher interest rate than loans with no or low points. But the latter might make more sense for someone who won’t be in their home long, she said.

Here’s why: Let’s say you saved $2,000 at closing by choosing a $100,000 no-closing-fee mortgage loan. The higher interest rate on this loan means that the monthly payment is $40 more than you would have paid with a $100,000 loan charging two points. That means that in order to make the higher interest rate worth it, you would have to stay in the house long enough to make paying points worth the cost. In this instance, it would take you 50 months (or 4.12 years) to make it worthwhile to choose the loan with the points. ($2,000 (amount paid for points) / $40 (savings per month) = 50 months.)

“After that, it’s really costing you money to have the higher interest rate than to pay the point” at closing, Hamrick said. But people who relocate before hitting that point will save money with the no-points loan.

For help determining whether or not you should pay points on a loan, use the LendingTree Discount points calculator.

Should you refinance your ARM before it resets?
You may be better off refinancing your adjustable rate mortgage (ARM) and paying a little more now in order to save a lot more down the line.

Most people choose adjustable-rate mortgages (ARMs) over fixed-rate loans because of their lower initial monthly payments. However, the rate and monthly payment of an ARM is eventually adjusted, or reset. For example, a 5/1 ARM resets after five years, and then annually after that. During periods of falling interest rates, the adjustments can be welcome. When rates are rising, however, you’ll have to brace yourself for higher monthly payments.

In order to help you determine whether you may benefit from refinancing, consider the following:

The rate caps on your mortgage
If you have an ARM that is about to reset, it’s crucial that you understand the caps on your loan. Caps are limits on the amount your interest rate (and, subsequently, your monthly payment) can go up. They are designed to protect you from the shock of extreme rate increases. There are three main types:

• The initial cap limits the amount your rate can go up at the first adjustment period.
• The periodic cap sets the maximum increase for any single adjustment.
• The lifetime cap restricts the overall amount your interest rate can be raised over the entire mortgage term.

As an example, imagine that you have a 3/1 ARM with an initial rate of 4 percent. Your initial and periodic caps are both 2 percent, and the lifetime cap is 6 percent. Now let’s assume your mortgage will reset for the first time in one month, and interest rates have risen since you obtained your loan. If your new fully indexed rate were 6.5 percent, your initial cap would protect you, keeping your actual rate at just 6 percent.

Note, however, that your loan will be adjusted again a year from now, and even if interest rates stay the same, your ARM will go up to 6.5 percent, because an increase of 0.5 percent is still well under the periodic cap of 2 percent. As long as interest rates continue climbing, your mortgage rate will climb with it, by a maximum of 2 percent a year, until the lifetime cap halts the increase at 10 percent. That’s why caps may not provide long-term protection against rate increases.

Current interest rate trends
When rates appear to be rising over a long horizon, it may make sense to refinance your ARM before it resets, especially if you’re planning to stay in your home for several years. By locking in now for three, five or seven-or-more years, you can protect yourself from the possibility of steadily climbing rates.

Here’s an example. Assume you have an ARM with a principal of $200,000 and 25 years left on its term. Your current rate is just 4 percent, but it will reset in one year, and you expect the new rate will be 5.5 percent, rising to 6.5 percent the year after, and an additional 0.5 percent at each of the next two annual adjustments. Here’s how your monthly payments would look:

Now imagine refinancing your mortgage today, a full year before your current one resets. You opt for a 5/1 ARM with an initial rate of 5.75 percent, which will remain fixed for five years. This rate is much higher than your current one, and even more than the new rate you expect in one year. Your new monthly payment would be $1,258, considerably higher than the payments you’ll be making over the next 24 months. However, by the time you get to year three, your choice would be looking pretty good. And in four years, your monthly payment will be almost $200 less than it would have been with your old ARM. Over the first five years of your new mortgage, you will pay about $2,000 less interest.

The cost of refinancing
Of course, even though interest rates have been trending upward since 2005, no one can predict for certain where interest rates will be headed next month, let alone four years from now. If they rise more sharply than in our example, refinancing could save you even more. On the other hand, if rates decline, refinancing may look unwise in hindsight. Remember, too, that refinancing carries upfront costs that eat into your overall savings. In general, the longer you are planning to stay in your home, the more sense it makes to refinance now.

To help you determine what your new monthly payments are likely to be when your ARM resets, use the LendingTree adjustable rate mortgage payment calculator.

Piggyback loans let you tap your home equity when buying
Homebuyers can use a second mortgage or line of credit to help with a down payment, or to finance other needs and wants.

A “piggyback” loan is usually defined as any type of second loan that’s closed at the same time as your first mortgage. The piggyback may be a traditional second mortgage known as a home equity loan, a home equity line of credit or some combination of a loan and a credit line.

Piggybacks serve various purposes
Homeowners take out piggyback loans for a variety of reasons when they purchase their home or refinance their mortgage. Many buyers use piggybacks to avoid mortgage insurance that’s required with a down payment of less than 20 percent of the purchase price of the house. Others may want to repair or remodel their home, buy a vacation home or new vehicle, fund a college education or meet major medical expenses.

A home equity loan is the usual means to avoid mortgage insurance or borrow a set sum of money for a long period of time, while a home equity credit line is useful to meet variable or relatively short-term financial needs.

Loan offers predictability; line offers flexibility
A piggyback loan typically has a fixed term and interest rate, though some loans have adjustable interest rates. Fifteen-year terms are common, though five-year, 10-year and other terms may also be available.

A piggyback credit line typically has a term of 15, 25 or 30 years and a variable interest rate. Unlike a loan, a credit line usually doesn’t have a fixed balance, but rather can be drawn upon at need and paid off at will during the term. Some credit lines allow you to convert a chunk of debt into a loan with a fixed interest rate and term.

Some lenders offer very low short-term “teaser” rates on credit lines as an inducement to homeowners. If you’re considering a credit line as a piggyback loan, be sure to consider not only the teaser rate, but also your ability to repay the debt when the rate increases after the low teaser rate expires.

The interest on a piggyback loan or credit line may be deductible as home loan interest expense on your income tax return. Consult a tax advisor to find out whether that benefit is applicable to your individual situation.

Loan products can be complicated, so it’s very important to be sure you understand how your loan is structured.

Be wary of high fees on piggyback borrowing
Piggyback loans and credit lines typically are offered with very little or even no closing costs, so be wary if closing costs or fees seem excessive. Some credit lines require a minimum balance or come with an annual or per-transaction fee.

The maximum amount you’ll be able to borrow will depend on the value of your home, the balance on your first mortgage, your credit history and other factors. Home equity loans and credit lines can be cheaper than other types of debt, but you could lose your home if you’re unable to repay your debt.

Down payment: What is the purpose?
Why do lenders want a down payment when you purchase a home? It’s all about security.

It’s standard procedure to make a down payment on a home at closing, and lenders have a good reason for wanting you to make one.

Security for the lender
A down payment provides security for the lender. If you put a significant amount of your own money into a home, you are less likely to walk away and default on the loan. Lenders, understandably, want to make sure that they’ll be repaid; your down payment provides that reassurance.

Easier loan approval for you
Another reason for lenders wanting a down payment involves loan approval. Your down payment makes it easier for you to qualify, and the more money you put down, typically, the easier it is for you to be approved. Though it may be possible now to obtain a loan with no down payment whatsoever, qualifying for a loan is a lot easier if you’re able to make a down payment.

Building your equity
When you make a down payment on a home, you’re building equity (the percentage of the property you actually own). And the more you put down, the greater your equity. The more equity you have, the less you need to finance and the less overall interest you will need to pay on your loan. A down payment therefore benefits not only the lender, but you as well.

How to avoid ARM reset shock
Concerned about rising interest rates? There are a number of ways to protect yourself from rate shock when your adjustable rate mortgage resets.

Adjustable rate mortgages (ARMs) have their advantages. For one, they often have an initial interest rate that is lower than a fixed rate mortgage. But they also have a disadvantage: one day, their interest rate will change, and you may find yourself facing “ARM reset shock.”

This occurs when the initial period is up and the interest rate is adjusted, or reset, to the current rate. Your payment then changes accordingly. If interest rates have gone up during that time — or if the initial rate was an artificially low “teaser” rate — your payment may go up steeply.

This rate shock can be even greater if you have a hybrid ARM. These mortgages have a low initial rate that stays fixed for a set period — usually two to five years. During that time, it’s easy to forget about the possibility of future higher payments should interest rates rise. But they may rise significantly at the end of the fixed-rate period. And possibly continue to rise at every subsequent six- or 12-month adjustment period.

The impact can be even more pronounced in the case of an ARM that has a discounted initial rate — a rate that’s lower than it’s fully indexed rate. For example, let’s assume you take out a $200,000 mortgage with a 30-year term, an initial one-year discounted rate of 4 percent and a fully indexed rate of 6 percent. According to the Federal Reserve Board’s Consumer Handbook on Adjustable Rate Mortgages, your first year monthly payments would be $954.83. But in the second year, when the discount period ends and the rate jumps to the fully indexed 6 percent, your payments would rise to $1,192.63. And if the index rate had also risen 1 percent during that period increasing the rate to 7 percent, your monthly payments would increase to $1,320.59. That’s an increase of $365.76 a month!

You could have a different kind of reset problem if you’ve been making the lowest allowable payment on an option ARM. These payments typically don’t cover all of the interest due on the loan, so your mortgage principal may actually be increasing. When the option ARM is recalculated, or recast — usually after five years — the higher balance is calculated in. Your payments can increase sharply, especially if interest rates have also risen. And the rate cap will not apply to this calculation.

If you have an ARM, it’s important to know when your reset date will arrive. But what can you do to protect yourself from rate shock when it does? Here are a few suggestions:

• Refinance to a fixed-rate mortgage before the reset date arrives. If you’re concerned about rising interest rates, consider refinancing. While your monthly payments may increase, you will be protected from future increases. But be sure to check if your mortgage has any prepayment penalties and to consider all of the other costs involved to determine if refinancing is right for you. Also, refinancing usually only makes sense if you plan to be in your home for several more years.

• Start a savings account so you can pay off a substantial portion of your mortgage when the reset date arrives. Check whether the terms of your mortgage allow you to do this without a prepayment penalty.

• Pay more than the minimum amount if you have an option ARM. If you’ve been paying only the least amount required, start paying the fully amortized amount. This will begin to reduce your mortgage balance before the recalculation date. If that’s not feasible, switch to the interest-only option so at least your mortgage balance won’t increase any more.

• Consolidate your debt. If a higher mortgage payment is going to make it hard for you to get by, consider seeing a credit counselor. There may be ways to restructure some of your high-interest debt by consolidating it into one lower-interest loan so you can afford the higher payments on your mortgage.

• Cut other expenses. Look to where you can cut costs to save more money. Some good places to start are services such as cable, DVR, cell phone, satellite radio, broadband internet, etc.

• Rent out part of your home. If your home is large enough, and your zoning regulations allow it, consider taking in tenants to help generate some extra cash to make the new payments.

• Downsize. If none of the above options can solve your problem, you may have to consider selling your home and downsizing to a home you can more easily afford. It’s better than facing the threat of defaulting on your mortgage. And you can always move up again in a few years once you’ve built up your home equity.

For more help understanding your options if you have an adjustable rate mortgage, visit LendingTree ARM Central.

Anxious about getting a loan? Here’s help
Go slowly to establish trust and get a home loan that meets your needs.

Let’s be honest: Applying for a home loan can be one of life’s most stressful experiences, and many people, especially first-time borrowers, are anxious about taking that first step.

Being nervous isn’t unreasonable. After all, a home loan is a major financial commitment; the application and approval processes are unfamiliar and complicated, and the ranks of loan officers, like those of any profession or trade, may include some folks who don’t have your best interest in mind.

Fortunately, there are some good strategies you can use to confront whatever fears stand in the way of your goals. Here are some suggestions to help you stop being overwhelmed by the entire process and instead focus on the first steps:

Be prepared
Before you begin to study specific loan products, think through your long-term financial and homeownership goals, and get ready to present your situation and explain your needs to the loan officer. Go over your household finances and figure out how much you can afford to spend on housing. Try to make a budget that includes estimates of property taxes, homeowner insurance, utilities, homeowner association dues, and maintenance and repairs as well as a monthly mortgage payment. For help figuring out how much you can afford, try our home affordability calculator.

Ask questions
Your initial conversation with a lending professional should be more of a fact-finding mission than a commitment on your part to obtain a loan through that individual. Prepare a list of questions you want to ask and pay attention to whether the loan officer listens to your needs and replies to your questions with information that you understand and that’s helpful to you. Take notes, so you’ll be able to reassure yourself later that you understood what you learned.

Set expectations
As part of your information-gathering process, ask the loan officer what services he or she provides. Explain that you want to be educated and kept informed about the progress of your loan. If you decide to submit an application, ask the lender to walk through the application and disclosure documents with you.

Mortgages aren’t free
No one wants to be overcharged for professional services, yet loan officers need to make a living and lenders need to make a profit to stay in business. You should expect to pay reasonable and customary costs, and you should receive a government-mandated Good Faith Estimate (GFE) of those costs before your loan closes. Tell the lending professional you don’t want to encounter any surprises when you sign your loan documents. For help understanding the GFE, read The Good Faith Estimate.

Say no
Remind yourself that you can always say no and walk away if you feel uncomfortable during your initial conversation. In fact, walking away is still an option even after you’ve completed an application, though you may have to forfeit an application or appraisal fee. Making sure you feel comfortable early in the process is the best way to protect yourself from a total meltdown later on.

Consider your options
Comparing products or services is a natural part of any big buying decision. Be sure to use a trusted source, like LendingTree.com, to help you find lenders that will meet your needs. When comparing, look beyond monthly payment and consider all the terms of the loan and how it will support your future financial goals. It’s also important to factor in how comfortable you are with the level of service you feel the lender will provide.

Rely on trusted resources
While these strategies can help you overcome your fears, at some point, you’ll need to trust the professional and company you’ve selected to do a good job for you. It’s okay to proceed slowly. Be patient, gather information, make thoughtful decisions and stay focused on your long-term financial and homeownership goals.