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New piggy-back loans can lower your payments when buying a home

By Jeff Lazerson

5/30/19

What’s up with mortgage rates? Jeff Lazerson of Mortgage Grader in Laguna Niguel gives us his take.

Rate news summary 

From Freddie Mac’s weekly survey: For the first time since January 2018, the 30-year fixed is under 4%, averaging this week averaging 3.99%. That’s seven basis points lower than last week. The 15-year fixed-rate averaged 3.46%, down 5 basis points from last week.

The Mortgage Bankers Association reported a 3.3% percent decrease in loan application volume from the previous week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $484,350 loan, last year’s payment was $161 higher than this week’s payment of $2,310.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages at zero points: A 15-year FHA (up to $431,250 in the Inland Empire, up to $484,350 in Los Angeles and Orange Counties) at 3.125%, a 30-year FHA at 3.25%, a 15-year conventional at 3.25%, a 30-year conventional at 3.875%, a 30-year FHA high-balance (from $484,351 to $726,525 in L.A. and Orange counties) at 3.50%, a 15-year conventional high-balance (also $484,351 to $726,525) at 3.625%, a 30-year conventional high-balance at 4.0%, a 15-year jumbo (over $726,525) at 3.875% and a 30-year jumbo at 4.50%.

What I think: Purchase money second mortgages, be it home equity lines-of-credit or fixed rates, were monster popular back in the go-go days of exotic lending.

In 2004, more than 48% of California purchase loan transactions, or 530,000, were facilitated with piggy-back seconds. Nationally, such mortgages made up 30% or almost 2 million of all purchase loans, according to Black Knight Inc.

Fast forward to 2018, just 5.8 percent, or 29,000, of California purchase transactions and 3.9%, or 163,000, of U.S. purchase transactions were funded with piggy-back second liens, Black Knight figures show.

But now innovative mortgage industry thinkers are creating mind-boggling second lien purchase money and cash-out financing instruments that will save mortgage shoppers armored cars of cash.

The prize of the many new programs goes to a new purchase money home equity line-of-credit or HELOC that gives you a better mortgage rate and gives you back a good chunk of your down payment right after your transaction closes.

Here is an illustration: Let’s say you are putting 10 percent down, or $45,000, on a $450,000 condo, and you have a 720 middle FICO score. In the Fannie Mae world, a zero-point loan will give you a 30-year fixed at about 4.125%. The principal and interest payment on the $405,000 loan amount would be $1,963. The private mortgage insurance (because you are putting less than 20 percent down) is an additional $132 for a payment total (excluding taxes, insurance and HOA) of $2,095.

Now, let’s take the clever HELOC.

With either savings, borrowed retirement funds or perhaps a little help from mom or dad, you put 25% down, for example. You will need to come up with an additional $67,500 for a total down payment of $112,500. This zero-point loan would offer a one-quarter percent lower interest rate at 3.875% on a 30-year fixed. The principal and interest payment will be $1,587. You must add this new HELOC within four months of your purchase closing. This instrument allows you to cash-out up to 89.99 percent of your down payment, or $67,455. Your rate is 6.24%. Your interest-only payment would be $351. Your first and second payment totals would be $1,938.

By maneuvering some money around, your 30-year fixed first mortgage is one-quarter percent lower. You avoid private mortgage insurance. Most importantly, you save a serious $157 per month using the delayed financing piggy-back.

Plenty of piggy-back purchase money seconds already existed before these new seconds became available. But Fannie Mae charges additional points of 1.125 or $3,797 (in this example) for the privilege of having subordinate financing simultaneously with your purchase transaction. And often the mortgage insurance is less expensive than a piggy-back purchase loan.

The other inventive idea about this loan is non-occupant co-borrowers are allowed. And, say mom and dad are the co-borrowers and their middle FICO scores are higher than yours. For pricing purposes, we get to use the highest middle credit score.