Theoretical Question

[Oscar_C]

Please keep in mind, I know this isn't exactly Mustachian, so bear with me.

My family has wanted to purchase a house for about a year. I told them the basics about a mortgage process. Afterwards they asked me something that I have not seen come up on a Personal Finance blog or forum.

As a result I wanted to know if instead of taking on one mortgage, would it be possible to instead take two or more smaller mortgages of an equal total and use a debt snowball to pay if off faster (of course based on interest rate instead of smaller balance).

Any answers would be appreciated.

[Spork]

Isn't this, more or less, how an 80/20 (aka piggyback) loan works?  For example: You get a loan for 80% for 30 years and a second loan for 20% for a shorter period (often at slightly higher interest).

[Silvie]

I don't know how this works in the US, but I have 2 mortgages, one which I need to pay off (+interest of course) and one that is interest-only (I pay them both off when I sell my apartment).

[Oscar_C]

Isn't this, more or less, how an 80/20 (aka piggyback) loan works?  For example: You get a loan for 80% for 30 years and a second loan for 20% for a shorter period (often at slightly higher interest).

So there is a term for it, great!

Now I need to know if it can be done involving a third loan.

It's something like this: 20% down, 20% for the 1st, 20% for the second, and 40% for the main bulk.

Paying off the highest interest 1st and after that using that payment towards the rest.

[Oscar_C]

I don't know how this works in the US, but I have 2 mortgages, one which I need to pay off (+interest of course) and one that is interest-only (I pay them both off when I sell my apartment).

If I could I'd pay the minimum on the 1st loan, and pay off the second as quickly as possible. Then after paying the second off, I'd use the payments that went for that and pay down the 1st faster.

[Spork]

Isn't this, more or less, how an 80/20 (aka piggyback) loan works?  For example: You get a loan for 80% for 30 years and a second loan for 20% for a shorter period (often at slightly higher interest).

So there is a term for it, great!

Now I need to know if it can be done involving a third loan.

It's something like this: 20% down, 20% for the 1st, 20% for the second, and 40% for the main bulk.

Paying off the highest interest 1st and after that using that payment towards the rest.

You'd also want to do the math to make sure that's really cheaper.  ;)

I think usually these loans are geared for folks that can't qualify for the whole amount or have special circumstances.  Often they have one or more loans that are at relatively high interest rates.  You might be better off with a single loan... so run the numbers.

[Silvie]

I don't know how this works in the US, but I have 2 mortgages, one which I need to pay off (+interest of course) and one that is interest-only (I pay them both off when I sell my apartment).

If I could I'd pay the minimum on the 1st loan, and pay off the second as quickly as possible. Then after paying the second off, I'd use the payments that went for that and pay down the 1st faster.

In Holland there's actually a limit as to how much you can pay off without being fined (!). Yes, you read that correctly. If we pay off our mortgage too fast, we get fined! We also have tax deductions for mortgages, it seems like the government wants people to have mortgages :S

[rightstuff]

Isn't this, more or less, how an 80/20 (aka piggyback) loan works?  For example: You get a loan for 80% for 30 years and a second loan for 20% for a shorter period (often at slightly higher interest).

So there is a term for it, great!

Now I need to know if it can be done involving a third loan.

It's something like this: 20% down, 20% for the 1st, 20% for the second, and 40% for the main bulk.

Paying off the highest interest 1st and after that using that payment towards the rest.

You'd also want to do the math to make sure that's really cheaper.  ;)

I think usually these loans are geared for folks that can't qualify for the whole amount or have special circumstances.  Often they have one or more loans that are at relatively high interest rates.  You might be better off with a single loan... so run the numbers.

I would also wonder if the fees you would incur would also nullify any savings?!

[Kazimieras]

Please keep in mind, I know this isn't exactly Mustachian, so bear with me.

My family has wanted to purchase a house for about a year. I told them the basics about a mortgage process. Afterwards they asked me something that I have not seen come up on a Personal Finance blog or forum.

As a result I wanted to know if instead of taking on one mortgage, would it be possible to instead take two or more smaller mortgages of an equal total and use a debt snowball to pay if off faster (of course based on interest rate instead of smaller balance).

Any answers would be appreciated.

You won't likely save anything. Most people/companies that loan want to know the entire amount of debt being taken on. The perk of a mortgage is that the debt is secured against an asset. What you're describing almost sounds like taking our a second mortgage (or third) on a place. The rates would be higher since there is more risk for the person lending you the money. So silly question, why do you want to do it this way?

[katheh]

If you are in the US, you will not be able to obtain a mortgage in the way you describe.

There is an 80/20 or 90/10 product available, but the smaller portion (the 20 or the 10) is at a much higher rate because it is a home equity loan/line of credit. That product is for people who do not have enough money to put 10% or 20% down on a house purchase. These types of loans are now (since 2008) rare and hard to qualify for.

There are several reasons that the loan style you want don't exist, but the biggest (in the United States) are the problems it would present with title insurance and/or foreclosure (3-4-5- loans to be repaid/cleared prior to a property transfer) and MOST of all because your mortgage lender wants to insure they receive the maximum money possible from you in interest payments. Lenders are not going to go out of their way to muddle the title with even more lien positions.

So, you could only do the scenario you mention only with a private money lender. Read: not a bank, not a mortgage company, not a commercial lender of any type. A private person with cash to lend you at amounts and a repayment schedule that suits you both. My saying this is not to imply that there are any private party lenders out there who will do this for you, just that this is the only scenario in which it could be done.

You can accomplish the same goal by getting a 15 year mortgage in the first place (making sure your mortgage has no prepayment penalty written in the terms) and maintaining an aggressive schedule of making extra principal payments.

[Cromacster]

Good advice above.

While in theory your idea may hold some ground, but in reality whats the point?  Why not just have one mortgage and pay a higher amount.  Sounds like you are trying to apply Dave Ramsey's snowball debt theory to a situation where it is totally unnecessary.

Food for thought...

One "strategy" mortgage payment that I like (and adhere to) is to take your standard mortgage payment and add on the principle that would be due the next month (make sure you add a note or someway to verify that the mortgage holder is applying it towards the principle and not interest).

This creates a steadily growing payment (snowballish if you will) and, with my situation, I will pay off my house in 15 yrs rather than 30 yrs.  My initial payments are around 1150 (850 standard payment, plus next months principle of 300).  By year 15 they will be around 1700 (850 standard payment, plus next months principle of 850), increasing about $5 per month throughout that time period.  Also saves me about 54,000 in interest payments.

Update: If you convert the extra payments to present dollars and convert the payments saved to present dollars I will end up with a net of -7,000.  Not a terrible loss considering I will be mortgage free.

(I am not an accountant or finance person, so my calcs could very well be wrong.  If you care to review my spreadsheet with the calcs let me know).

[Oscar_C]

Please keep in mind, I know this isn't exactly Mustachian, so bear with me.

My family has wanted to purchase a house for about a year. I told them the basics about a mortgage process. Afterwards they asked me something that I have not seen come up on a Personal Finance blog or forum.

As a result I wanted to know if instead of taking on one mortgage, would it be possible to instead take two or more smaller mortgages of an equal total and use a debt snowball to pay if off faster (of course based on interest rate instead of smaller balance).

Any answers would be appreciated.

You won't likely save anything. Most people/companies that loan want to know the entire amount of debt being taken on. The perk of a mortgage is that the debt is secured against an asset. What you're describing almost sounds like taking our a second mortgage (or third) on a place. The rates would be higher since there is more risk for the person lending you the money. So silly question, why do you want to do it this way?

Strictly speaking I'd rather not, It's a question that my sister asked me when I brought up purchasing a house for the family.