I apologize if I am not clear as this is new to me. My partner and I are exploring mortgage options for a house priced at 1.3M with a 20% down payment. It’s important to us to have the flexibility to adjust our mortgage terms later. Once we sell our current home, we expect to make a 400k profit, which we plan to immediately apply to our new mortgage. One of the mortgage consultants suggested we could opt for two separate loans—one for 600k and another for 400k, instead of a single large loan, to potentially reduce the interest rates and monthly payments, especially since we plan to quickly pay off the smaller loan with our home sale profits. This approach is different from what I was considering, and I’m looking to understand if it’s a viable or common strategy. Any insights would be greatly appreciated.
That’s a strategy known as a piggyback loan, which can help avoid the higher rates and stricter requirements of a larger, single loan
Storm said:
That’s a strategy known as a piggyback loan, which can help avoid the higher rates and stricter requirements of a larger, single loan
Actually, when you’re well-qualified, jumbo loan rates can be lower than conventional ones if you deal directly with a bank.
@Carson
That wasn’t the case when I bought my house—both rates were similar, but I ended up choosing a conforming loan up to the limit and a second, smaller loan for the balance, which we quickly paid off. Of course, rates have shifted over the years.
@Mica
Were your negotiations with a bank or a broker? Direct bank dealings usually offer lower jumbo rates compared to brokers.
Carson said:
@Mica
Were your negotiations with a bank or a broker? Direct bank dealings usually offer lower jumbo rates compared to brokers.
I worked directly with the bank for the jumbo and with a credit union for the conventional and piggyback loans.
Storm said:
That’s a strategy known as a piggyback loan, which can help avoid the higher rates and stricter requirements of a larger, single loan
Another option might be a bridge loan.
You might consider taking a primary and a secondary mortgage at purchase. The secondary would have a higher rate but it’s short-term if you’re planning to pay it off quickly with proceeds from selling your current home.
Just be cautious with using projected profits. Market changes could affect the actual profit, which might complicate your financial strategy if the proceeds are lower than expected.
If the terms of the 600k loan are better than those of a single 1m loan, it makes sense. Also, you’ll save on any recast fees some lenders might charge. It’s all about the numbers—just make sure there’s no penalty for early repayment on the smaller loan.
That’s a type of 80/20 loan. It was popular in the early 2000s. Here’s a resource for more info: https://placehold.co/600x400.png
The advisor is likely suggesting a conventional loan setup where you take a primary mortgage for 600k and a secondary for 400k. This might avoid the higher rates associated with jumbo loans, allowing for a potentially better deal.
Check what the fees would be for recasting your loan. It might be a low-cost way to adjust your mortgage after applying the profits from your home sale.
I did something similar when buying our house. Took a secondary mortgage to apply equity from our previous home sales, which allowed us to avoid recasting. It was straightforward with minimal fees as we used the same lender.
We used two mortgages initially for better rates on the primary. The process was straightforward, especially with the same bank. However, ensure you’re confident about the profits from your current home as it directly affects your ability to pay off the second mortgage.
I went with two separate mortgages earlier this year for a similar situation. Here’s how we structured it:
Purchase price: $1,260,000
Down payment: $260,000
1st mortgage: $750,000 at 7.50%
2nd mortgage: $250,000 at 7.75%
We quickly paid off the second mortgage after selling our first home and are currently refinancing the first to a lower rate.
@Blue
What made you choose this route instead of a single larger loan?
Graydon said:
@Blue
What made you choose this route instead of a single larger loan?
Opting for two conventional loans provided a better rate at the time and allowed more flexibility compared to a large jumbo loan. It was also a safer option in case recasting wasn’t available when needed.
Graydon said:
@Blue
What made you choose this route instead of a single larger loan?
If you’re close on the numbers for the $400k payoff, consider adjusting the loan amounts to give yourself some breathing room and maintain some cash reserves.
Wait until your current home actually sells before counting on the equity. Also, keep in mind that managing two mortgages could double your closing costs and add to the complexity. If this suggestion mainly benefits the mortgage consultant, be cautious.