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The No-PMI 10% Down Mortgage: 80-10-10 Piggyback - YouTube
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- Not a fan of PMI?
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Neither are a lot of homebuyers,
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so that's why we're gonna talk
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about the 80-10-10
piggyback mortgage today,
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which allows you to put only 10% down
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and avoid private mortgage insurance.
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We're gonna talk about
how this thing works,
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so watch all the way to the end
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to figure out how you can put 10% down
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and avoid PMI.
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Let's do this.
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We're gonna talking
about what this loan is,
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why get an 80-10-10 mortgage,
80-10-10 pros and cons,
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what are the terms of the second mortgage,
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who qualifies, and 80-10-10 lenders.
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So first of all, what is an 80-10-10 loan
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and why is it called a piggyback, anyway?
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Well, this is actually not
one loan, but two loans,
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and you get two loans simultaneously,
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one piggybacking on top of
the other, hence the name.
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This might be confusing,
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but let's take a look at this infographic.
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On a $300,000 home, you
take a primary mortgage out
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for 80% of the purchase
price, in this case, $240,000.
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Then you take out a second mortgage
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for 10% of the purchase price, or $30,000.
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That leaves you with just 10% down.
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So in this way, you only have
to come up with 10% down,
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but since your first mortgage is only
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for 80% of the home's price,
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you don't need private mortgage insurance,
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also called PMI.
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You're probably thinking, why do this?
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This sounds complicated.
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Well, let's find out.
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There are two main
reasons you might do this,
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number one, to avoid PMI,
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and number two, because
your costs might be lower.
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Now, we'll talk about costs in a minute
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because that's not as clear-cut,
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but let's talk about PMI first,
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'cause that's maybe the biggest advantage
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of this loan type.
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Many people don't like the idea
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of paying PMI because it's actually a fee
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that protects your lender, not you.
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If you default on your mortgage,
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the PMI will come in
and pay that lender back
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for any losses, but you're
still out of your house,
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so it doesn't really do you much good,
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except that you can buy a house sooner
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than you might have been able to before
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because you're putting less down
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in exchange for paying that PMI rate,
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and that's where the
piggyback loan comes in.
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Now you probably have heard that,
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unless you put 20% down,
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you're gonna owe private
mortgage insurance,
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which is a monthly fee, again,
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that protects your lender, and not you.
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With a piggyback loan,
you actually finance half
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of that 20% down payment,
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and in the eyes of the
first mortgage lender,
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you're actually coming
up with 20% down payment.
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Now, you're not fooling anybody.
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Everybody knows all the
loans that you're getting.
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Your first mortgage lender knows
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that you're getting a second mortgage
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for half of your down payment,
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but in their eyes, and as far as PMI goes,
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they are accepting that
financed down payment
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as part of your real down payment.
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So what are some of the advantages
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and disadvantages, pros
and cons, of doing this?
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First of all, let's talk about cost.
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And really, there's no clear-cut answer
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on whether a piggyback
loan will be cheaper
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than getting PMI.
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It's really up to your
scenario and your situation.
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So I would suggest, if you have 10% down,
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have your loan officer run both scenarios,
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because you could be
surprised that one is cheaper
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than the other.
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You could assume that a 80-10-10 loan,
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piggyback loan, is cheaper because
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it doesn't come with mortgage insurance,
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but keep in mind you'll have
a second mortgage payment
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that you'll have to pay,
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and you might find out, if
you have really good credit,
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that getting a single loan at 90%
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of the home's purchase price,
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and then paying PMI on top of that,
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is actually cheaper than
getting the piggyback loan
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with a second mortgage option.
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So just run both scenarios.
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You don't ever know, really,
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which one is gonna be cheaper for you.
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You just have to look at 'em both.
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So some of the factors
that can go into this is,
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number one, whether your
second mortgaged is fixed
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or variable, the interest
rate on your second mortgage,
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whether your second mortgage is a 15-year,
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20-year, 25-, 30-year, your credit score,
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which can really dramatically
affect your PMI costs,
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and the type of loan that you choose
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for your first mortgage.
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So all in all, cost is
neither a pro or a con.
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It's just something you need to examine.
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So besides cost, what are
some of the other pros
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for a 80-10-10 loan?
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First of all, we already
talked about this a lot,
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but no private mortgage insurance.
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One of the not-so-obvious advantages is
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just the ability to pay
off that second mortgage
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any time you want.
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Now, if you get a loan with
private mortgage insurance,
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you might not be able to cancel
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your mortgage insurance right away.
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It could be a couple years,
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could be five years,
before you can even remove
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that PMI, and the reason is,
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different lenders, different servicers,
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have different rules about PMI
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and when you can remove it.
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Some have waiting periods.
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Sometimes you have to get a new appraisal,
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which comes at a cost, to prove
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that your home equity is there.
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Sometimes you have to pay down
your loan a certain amount
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before they let you remove your PMI.
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And yeah, you can always
refinance out of PMI.
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If you have enough equity,
you can refinance into a loan
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that doesn't require it, but that comes
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with thousands of
dollars in closing costs.
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So it's not always clear-cut
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that you can totally
remove your PMI payment
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any time you want.
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Now, that's in stark
contrast of an 80-10-10 loan,
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where your second
mortgage, your 10% portion
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of the purchase price, you
can pay that off any time
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and eliminate that payment completely.
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So let's say you're buying a home now,
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but you know in six months
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you're gonna get an inheritance,
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you're gonna get a bonus at work,
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you're gonna be able to cash in
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some stock options,
something to that effect,
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let's say you had the second mortgage,
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you bought a house, and you
had a $30,000 second mortgage.
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Well, you know you're
gonna get $30,000 bonus
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or something like that in six months.
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You don't wanna take out a loan with PMI,
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thinking that you can just pay down
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your loan at that time
and your PMI will go away.
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That's not always the case.
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So you might wanna get the 80-10-10 loan
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because you know, at the
end of that six months,
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as soon as you get that bonus from work,
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you can pay off your second mortgage,
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that's a $2- or $300-a-month payment,
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for that second mortgage
will just go away,
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and you're just left with
your first mortgage alone.
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So that could be one very good use case
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of why you'd wanna get an 80-10-10 loan
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over a loan with PMI.
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Now, while 80-10-10 piggyback loans have
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their advantages, they also come
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with some things you have
to watch out for, as well.
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Number one, you need pretty good credit,
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mainly because of the
second mortgage part of it.
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The second mortgage is offered
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by a private lender somewhere.
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It's not always the same
lender as your first mortgage.
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It comes with different rules
than your first mortgage,
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so your second mortgage lender
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might require a higher credit score,
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maybe some more solid employment history.
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They might not accept
self-employed buyers,
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all this stuff.
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So you could potentially
just need a stronger profile
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to qualify for the second mortgage at all.
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And since these are two separate loans
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from two separate lenders,
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you have to qualify for
two sets of criteria.
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Third disadvantage is just
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that a second mortgage
is probably gonna come
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with an adjustable mortgage rate,
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and as the Fed increases its rate,
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the primary also goes up,
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and these second mortgages are
usually tied to prime rate.
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And so you could see
yourself getting a rate now,
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and in a couple of years, it's
two or three percent higher,
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depending on what the Fed does.
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So that's another thing
just to think about.
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And then, finally, the last con
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about get a piggyback loan is just having
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to close two loans simultaneously,
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and the first mortgage lender
is probably pretty in-tune
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with closing dates on purchases.
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Not always the case with
a second mortgage lender,
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so you just wanna make sure that
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they know this is a purchase,
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they have to close on a certain day,
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and they have to coordinate
with that first mortgage lender
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so that both phones close on the same day.
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So overall, a lotta great advantages
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of the 80-10-10 piggyback loan,
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but there are some things to be aware of
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if you choose that option.
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So speaking of the second mortgage,
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let's dive into that a little bit more
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and see exactly how these work,
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'cause this is kind of
a different concept.
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Not a lot of people talk
about second mortgages,
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haven't ever since the
early 2000s, really,
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when a lotta people were
getting home equity lines
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of credit and second mortgages.
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Now, second mortgages kind of
have a negative connotation.
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You hear people say, oh,
my kid went to college.
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I needed to take out a
second mortgage on the house.
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Or I just filled up my gas tank.
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I need to take out a second mortgage.
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But people kinda
reference second mortgages
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as if they're something you get out
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in this dire circumstance,
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and that's not always the case.
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In fact, that's pretty rarely the case.
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If you're already in a bad situation,
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you probably can't get approved
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for a second mortgage, anyway.
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So second mortgages are actually a tool
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that people use all the time.
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Usually it's when they
own a house already,
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they wanna do a remodel,
they're paying off debt,
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they wanna pay off a student loan,
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something of that effect.
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They'll take money out of the equity
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of their house to do that.
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So in this case, you're
kinda doing the same thing,
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except you're using that second mortgage
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to pay part of your down payment.
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As mentioned, these can
come with variable rates,
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which you have to watch out for.
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They also come with fixed rates,
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so check in options will.
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You might be able to
get one that is locked
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in at a certain rate and never rises.
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Keep in mind that, if
you do get a fixed rate,
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it's probably gonna
come with a higher rate
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and payment than if you
choose the variable rate.
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Another thing to keep in mind
with a second mortgage is
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that it'll come with a
totally separate payment
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every month, so you have to remember
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to make two payments
every month, not just one.
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So who qualifies for the 80-10-10 loan?
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Typically these loans are great
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for people with solid
income, great credit,
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they have reserves in the bank, and again,
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that's because a second
mortgage lender's probably be
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a little bit more strict
on qualifying factors
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than the first mortgage lender.
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So if your situation
is a little more shaky,
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you might wanna consider a single loan
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with private mortgage insurance,
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or something like FHA.
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But just know that it could be harder
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to qualify if you have a
more shaky profile like that.
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So lastly, what lenders
offer this type of loan?
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First of all, you should really find
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somebody who's experienced,
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who's done these loans a number of times,
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because there are some
tricky aspects to them.
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You know, if a loan officer has never done
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this type of loan, they might not know
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that they have to really be
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on top of the second mortgage lender
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to make sure that they're
gonna close the same day
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as they're closing their first mortgage.
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Your lender should also have access
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to a wide variety of second mortgages.
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Most lenders across the country
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have great first mortgage options,
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they can give you a conventional FHA loan,
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but a lot of 'em don't have access
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to a second mortgage program,
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because usually that requires working
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with a different bank altogether
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to get that financing in place.
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So if you go to a big bank,
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they might not be willing to reach
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out to another bank to
get that second mortgage.
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They might only offer you the PMI option.
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The good news is that
home.com's parent corporation,
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Fairway Independent Mortgage Corporation,
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has a wide variety of first
and second mortgage options,
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so you can kinda shop around,
see which one works for you,
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which one's better for your situation.
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So I'm gonna leave a
link in the description.
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Go ahead and click that and we'll connect
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you with a 80-10-10 piggyback lender,
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someone who knows how to
close these loans really fast.
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Fairway also has a nationwide network
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of local loan officers if you wanna talk
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to somebody in person in your hometown.
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There's probably somebody to help you.
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All right, I hope I shed some light
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on this little-known, but powerful program
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in this video.
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Go ahead and click Like and Subscribe
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for more explainers like this
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if you're interested in home-buying
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or anything to do with real estate.
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I'm Tim Lucas, senior editor
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of home.com and a former loan officer.
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Hope you enjoyed the video.
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Like and subscribe, and we'll
see you on the next one.
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(downtempo music)
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