November 19, 2018
Orion’s brokers hear all kinds of stories, see all kinds of borrowers. They know that not all, but almost all, piggy-back mortgages are Home Equity Lines of Credit (HELOC). They are asked by their clients, “What is a HELOC?” And they often reply, “It is very similar to a credit card, you have a maximum credit limit and you only make payments on the balance you have outstanding. Keep in mind the interest rate on a HELOC is an adjustable rate that is tied to the prime rate which goes up and down.”
An appealing feature of many HELOCs is that the minimum payment is interest only which can be very low. Our experienced brokers will tell borrowers that they are not paying down any of the outstanding principal which becomes an issue in later years when they have a very large balance that must be paid off.
Because the piggy-back is a second loan that bridges the amount between a down payment and a mortgage of 80% of the purchase price, the client can put less than 20% down and avoid mortgage insurance.
And Orion’s brokers know that since the HELOC is used to purchase the home, the interest paid on the loan is tax deductible under the current tax code. This is a positive for many families, especially those who are unable to deduct mortgage insurance premiums.
As our brokers know, there are some positive aspects to using a HELOC to purchase a new home but there are drawbacks to consider dependent upon your client’s individual financial situation.
Brokers know that the only way to remove a HELOC payment is to pay it off, and unless they have the resources to make very large payments over the years such as large bonuses or a property that can be sold. More than likely it will take a considerable amount of time to pay off the loan. For most families, the long-term best option is to purchase their home using mortgage insurance. MI has fixed payments and the premium payments can be removed in the future, as opposed to a large equity line tied to the prime rate, that will be going up over the next few years.