A Focus on Piggyback Florida Home Loans: Pay Off Higher Mortgage First
As you navigate your way through the real estate world and try to determine the best possibility for purchasing, a piggyback Florida home loan may offer the most appealing option. Under terms of such a deal, you take out a pair of loans that close at the same time.
The question, therefore, becomes: which Florida home loan should you pay off first?
One buyer recently wrote in and said he avoided mortgage insurance by following this course of action. His piggyback deal centered around one five-year, adjustable rate Florida home loan; the second was a 15-year fixed-rate mortgage (FRM).
The cash flow of this individual allows him to pay more than the interest on the ARM and the full payment on the fixed-rate Florida home loan. So he asked expert Jack Guttentag if he should apply the excess to the ARM or to the FRM?
The Professor of Finance Emeritus at the Wharton School responded as follows:
The general rule is to pay down the higher-rate debt first, which is the second mortgage. If both mortgages were FRMs, this would be a no-brainer; you would allocate all surplus cash to the second until it was paid off. The same is true when the first mortgage is a five-year ARM and you confidently expect to be out of the house within five years.
On many piggyback Florida home loans, the first mortgage is fixed and the second is adjustable with a higher rate. In this case also you would channel excess cash flows toward the second.
Dealing with the first, adjustable-rate Florida home loan
But if the first mortgage with the lower rate is adjustable and your time horizon extends beyond the first rate adjustment, or if you are uncertain about it, the decision is trickier. While you should start by paying down the higher rate second, if market rates spike during the first five years, the rate on the ARM could jump by as much as 5 percent at the first rate adjustment. In that case, at some point before the rate adjustment, you should start paying down the ARM.
There’s no way to know exactly when to do this; you’ll have to rely on your gut. But your gut needs to be kept informed regarding the adjustable Florida home loan rate expected at the first rate adjustment. This is easy to do but you must know the index used by your ARM, the margin, and the caps, all of which are shown in your note.
This all may seem confusing, but it’s an important option to keep in mind. If you cannot afford a down payment at the moment, you may still purchase a house through such a Florida home mortgage loan.
