Monday, 10 April 2000
.....
The wife and I are house-shopping. We find ourselves in an unusual position among home-buyers these days: although we currently own our home (a condominium), we don't need to sell it first to raise cash for the down payment. In fact, we can probably just about pay 20% down out of our savings and avoid those pesky mortgage insurance premiums.
The mortgage companies want to make it very easy to buy too much house, though. We know how much we want to spend and will not be convinced to spend more than that, but if we didn't have the cash or the proceeds from the sale, we could get a 5% or even 0% down loan.
Here's how one creative financing technique, a "piggyback" loan, works:
You get 30 year, fixed rate loan for 80% of the purchase price, at say 8%. Then you get another loan, for the 20% down payment. This is a 30/15 fixed rate loan, which means it costs a slightly higher rate, maybe 9.5%, for the first 15 years, and then it balloons to a much higher rate. The idea is to encourage you to pay it off early.
Thus, you have paid no money down, but you're paying off two mortgages concurrently. Your payment will be about the same as if you paid 10% down, at least for the first 15 years. This is how the mortgage companies convince buyers to spend money they don't even have yet. Of course, a fixed rate mortgage payment actually decreases in real terms over the life of the loan, so that monthly check will hurt less and less over time.
Using a piggyback loan, we've designed financing for ourselves that will actually decrease over time. We'll put 10% down in cash, then either spread another 10% over about a year and a half, or set it aside in a high-performing mutual fund and pay the loan off when the time is right (even though we could pay it all right up front). Either way, we pay off the piggyback loan in less than two years, and we'll be left with a nice low monthly payment so we don't have to work like corporate slaves for the rest of our lives.
This is Creative Home Financing <http://monkeyfist.com/articles/418>