Purchase Price 1st Mortgage Amount Down Payment Piggyback Loan Amount $200,000 $160,000 (80%) $20,000 (10%) $20,000 (10%)

Piggyback Loans vs. PMI
As with every financial option, there are pros and cons associated with both piggyback loans and PMI. Choosing the option that’s best for you depends on your individual financial situation and your state’s regulations.

TIP: Before deciding to select a piggyback loan instead of PMI, you should consult with a financial professional.

Home Equity Loans vs. Line of Credit
Understand the difference and decide which option is best for you. If you’re a homeowner, you can borrow against the value of your house through either a home equity line of credit (often called a HELOC or a line) or a home equity loan (often called a HEL or loan). Both are essentially a second mortgage.

What’s the Difference?
A HELOC is a form of revolving credit similar to a credit card. It allows you to draw funds, up to a predetermined limit, whenever you need money. There is generally a minimum payment due each month, with the option to pay off as much of the line as you want. With a HEL, you receive a lump sum of money and have a fixed monthly payment that you pay off over a predetermined time period. In each case, the amount you can borrow is based on factors such as your income, debts, the value of your home, how much you still owe on your mortgage and your credit history.

Benefits
The appeal of both of these types of loans is their interest rates, which are almost always lower than those of credit cards or conventional bank loans because they are secured against your home. In addition, the interest you pay on a home equity line or loan is often tax deductible (consult a tax advisor about your particular situation).

Which is Best for You?
Generally, a HELOC is a good choice to meet ongoing cash needs, such as college tuition payments or medical bills. A HEL is more suitable when you need money for a specific, one-time purpose, such as buying a car or a major renovation.

Comparing the Costs
Both HELOCs and HELs usually carry a higher interest rate than that of a first mortgage. With a HEL, you may choose either an adjustable rate that fluctuates according to variations in the prime rate, or you may opt for a fixed rate. A fixed rate enables you to budget a set payment monthly without worrying about increasing costs should interest rates rise. With a HEL, there are also closing costs that you should consider.

A HELOC usually carries a lower initial interest rate than a HEL, but its rate fluctuates according to the prime rate, so there is more interest rate risk. Unlike a HEL, where your monthly payments are a set amount, a HELOC enables you to borrow funds as needed and repay as little as interest only each month. In addition, there are generally no closing costs when you open a HELOC.

Keep in mind, your home is the collateral for both a HELOC and a HEL. If a HELOC’s easy access to cash tempts you to run up more debt than you can repay, or if you fail to make your payments, you risk losing your house.

 

Ask an Expert: What is a mortgage accelerator loan?
Q: I've heard you can pay off your home faster by taking out a "mortgage accelerator loan" instead of a regular mortgage. How do these work?
A: A mortgage accelerator is an innovative type of home loan that’s new to the United States. In the U.K. and Australia, however, these mortgages have long been used as an effective way to pay down your mortgage more quickly.

The first thing to understand is that a mortgage accelerator is a revolving home equity line of credit (HELOC), not an amortized loan. That means you do not have a fixed payment to make each month. Instead, you may pay only the interest for the first 10 years. Of course, paying only interest does nothing to reduce your mortgage principal, so here’s where the innovative part comes in: you arrange to have your entire paycheck deposited to your line of credit account. When you need access to your money for day-to-day expenses, you use the HELOC just like a checking account -- you can pay bills online or by mail, and you can make cash withdrawals with an ATM card.

So how does this save you money? The key is that interest on a line of credit is calculated daily, so every reduction in the balance, even if it’s only temporary, means you pay less interest. With your salary going directly into the HELOC, the balance will drop dramatically every time you get paid, and then it will creep back up slowly as you draw on the money. Meanwhile, instead of that idle cash earning little or nothing in a checking account, it will save you 5 or 6 percent (whatever the current rate is on the HELOC) in interest. Over the long run, with every unspent dollar of your paycheck going toward reducing your principal, you could wind up owning your home much more quickly than you would have with an amortized loan.

Most amortized mortgages allow you to make extra payments to reduce the principal, but if you wind up needing that money for an emergency, you can’t get it back without taking out another loan. One of the selling points of the mortgage accelerator is that you can reduce the principal with every extra dollar, while still having access to the funds should you need them.

Mortgage accelerator HELOCs come with one caveat: they can be dangerous for those who overspend. If your biweekly net income is $3,000, but you withdraw $6,200 over the course of a month -- which you’re free to do with a revolving line of credit -- your principal will go up instead of down. Rather than paying your home loan faster, you may wind up dragging it out longer. If you don’t have the discipline to spend less than you make, you’re better off with an amortized loan, which builds in the forced discipline of a stable monthly payment.

Discount Points
Discount Points are paid up front to obtain a lower interest rate on your mortgage. The more points you pay the lower the rate you may obtain. Usually, one point equals one percent of the loan amount and will lower the interest rate by .25 percent.

To get an idea of whether or not it is worth it to pay points do the following:

• Divide the amount paid in points by the amount saved by the lower monthly payment.

• For example, if you are borrowing $100,000 you can pay no points at 7% interest for 30 years, which is roughly $665 per month.

• Or you can pay 2 points for a 6.5% rate, which is roughly $632 per month.

Your savings per month is $33 ($665-$632).

The amount you pay for 2 points would be about $2000 (1 point is 1% of 100,000 or $1000). Following the formula…

$2000 (amount paid for points) / $33 (savings per month) = 60.6 months.

That is how long you would need to keep the house to make paying points worth the cost.