As the name implies, a first mortgage is a mortgage in the first lien position on the property that is secured by the mortgage. Typically the dollar amount of the first mortgage loan is for the majority of funds needed to secure financing to purchase the home.
A second mortgage, also known as a piggyback mortgage, is done at the same time as the first mortgage and takes the second lien position on the property. The use of a second mortgage can help ease:
- A large out of pocket down payment
- Private Mortgage Insurance (PMI)
- High initial upfront costs
- High interest rates associated with Jumbo loans
Here’s how a 2nd mortgage works with the purchase of a home:
- A potential borrower typically applies for a 1st mortgage loan for 80% of the sales price.
- The borrower would then also apply for a 2nd mortgage loan that would be used as part of the 20% down payment of the sales price.
- Borrowers are expected to contribute a 5-15% down payment from their own funds toward the 20% down payment.
- The 2nd mortgage loan would incur fees and closing costs in addition to those incurred with the 1st loan. This also means the borrower will have 2 monthly mortgage payments.
An upfront 20% down payment can be daunting to any budget. Keep in mind that there are plenty of other primary loan programs that do not require a 20% down payment. Several agencies allow 0% – 3.5% down payments, such as the Federal Housing Administration (FHA) , Department of Veterans Affairs (VA) and the United States Department of Agriculture (USDA-RD). Many State Housing Agencies allow borrowers to receive cash assistance for down payments, too.
Your loan officer can help you explore your home financing options.