Real estate investors have lots of options. They have the option of the type of property in which to invest. They have the option of which bank to work with. The type of loan used to finance the purchase is also another important consideration. Is the property going to be held for long-term appreciation and monthly cash flow or a “fix and flip” project? Finally, how much to put down. The down payment will help determine the monthly payment to the bank along with prevailing interest rates. For properties that are being held for the long haul, the lower the monthly payment, the greater the monthly income. For flips, the interest rate and down payment is less of a concern as the interest rate and payment is short term- the key is what the property can sell for and what the net proceeds will add up to.

 

For those wish to conserve their cash and leverage as much as possible, another option is to utilize the “piggyback” program. Most mortgage programs used to finance a hold ask for at least 20 percent down, otherwise, private mortgage insurance kicks in. Private mortgage insurance is in fact an insurance policy paid for by the borrowers to the benefit of the lender and covers the difference between what the borrowers put down and the 80 percent level. This premium can be removed when the loan balance naturally amortizes below 80 percent of the original purchase price. With a 30 year loan, this can take nearly 12 years.

With a piggyback, there are two mortgages. One at 80 percent of the sales price, avoiding private mortgage insurance, and a second lien at 10 percent of the sales price. Banks often refer to this combination as an 80-10-10 loan. In this fashion, borrowers avoid having to pay mortgage insurance while still having a competitive monthly payment, increasing cash flow. The second lien can always be paid off in advance with extra payments as there are no prepayment penalties. Real estate investors need their cash to be used to buy more real estate. And when leveraging the power of the piggyback, this program helps that effort.