Sat. May 28th, 2022
A piggyback loan is one way to finance a home without a lot of cash up front, but it will come at a cost
  • With a piggyback loan, you take out one larger mortgage and a second smaller one.
  • Funds from the second mortgage go toward your down payment, which can result in better terms on the first mortgage.
  • A piggyback loan comes with extra costs, so be sure to determine whether it would actually save you money.
  • Read more stories from Personal Finance Insider.

When you want to buy a home, coming up with a down payment can be a major hurdle — especially if you want to put 20% down to avoid paying for private mortgage insurance. If you’re struggling to afford a sizeable down payment, a piggyback loan could be a good option for you.

What is a piggyback loan?

A piggyback loan involves taking out two mortgages, one large and one small. The smaller mortgage “piggybacks” on the larger one. The primary loan is a conventional mortgage. The other is a home equity loan or home equity line of credit

The main reason to take out a piggyback loan is to avoid paying for private mortgage insurance.

“Certain times, they work really well,” says Darrin Q. English, senior community development loan officer at Quontic Bank. “Even though you have rates that are in the nines or tens on that second mortgage, it still represents a lower monthly payment and a better use of your income, versus paying insurance premiums that don’t do anything for you.”

Types of piggyback loans

There are many types of piggyback loans, and their main differences come down to math.

80-10-10 loan

An 80-10-10 loan is probably the most common type of piggyback loan. The first mortgage is for 80% of the purchase price, the second is for 10%, and you provide 10% cash for the down payment. By combining the second mortgage and the money you already have saved for the down payment, you’ll have 20% total to put down.

80-15-5 loan

This is similar to an 80-10-10 loan, but you may prefer it if you have around 5% for a down payment rather than 10%.

80/20 loan

An 80/20 loan is a worthwhile option if you have little to no money saved for a down payment. Your first mortgage is for 80% of the home price, and the second mortgage is for the 20% you’ll use for the down payment.

75-15-10 loan

A 75-15-10 loan is most often used for condominiums, because interest rates on condos are higher when you have to borrow more than 75% of the purchase price.

Pros and cons of a piggyback loan

Pros

  • You avoid private mortgage insurance. With conventional mortgages, you have to pay for PMI if you have less than 20% for a down payment. By using a second mortgage to reach a 20% down payment, you don’t have to pay up to hundreds of dollars each month for PMI.
  • You can steer clear of a jumbo mortgage. You need to apply for a jumbo mortgage if you want to borrow more than the FHFA allows. Jumbo mortgages have stricter requirements that you may or may not meet, and they charge higher interest rates. Taking out a second mortgage will make your first mortgage smaller, so you can get out of applying for a jumbo mortgage.
  • It’s convenient if you’re selling your home. Are you selling one home and buying another one? It might be hard to afford a 20% down payment on the new house if your original one hasn’t sold yet. A piggyback loan can provide those funds until the home sells.

Cons

  • Interest rates are often adjustable on a HELOC or home equity loan. “It’s unpredictable where rates will go, how the Federal Reserve will increase rates, and what that will do to an adjustable-rate mortgage in the months to come,” English says. “That uncertainty is a reason why folks should be cautious about a piggyback.”
  • You’ll pay closing costs twice. With a traditional mortgage, you’d pay closing costs once. But with two mortgages, you pay for everything two times.
  • You’ll have two mortgage payments. Until you pay off the second mortgage (which usually has a shorter term than the first one), you’ll make two payments each month. Consider whether you can fit this into your monthly budget.

Alternatives to a piggyback loan

Pay for private mortgage insurance

You may prefer to pay for PMI, especially if it turns out that PMI would be less expensive each month than a second mortgage payment. Lenders are required to cancel PMI once you have 22% equity in your home, but you can request to cancel it early when you reach 20%.

Apply for a jumbo mortgage

If your credit score and debt-to-income ratio are strong enough to qualify for a jumbo mortgage, you may prefer to make just one payment each month.

Buy a less expensive home

Buying a less expensive home could help you qualify for a conforming mortgage rather than a jumbo mortgage. This would eliminate your need to bypass a jumbo mortgage with a piggyback loan.

A more affordable house might also help you afford a 20% down payment, so paying for PMI wouldn’t be an issue.

Take out a bridge loan

Are you considering a piggyback loan because you’re moving and haven’t sold your house yet? A bridge loan might be a better fit.

This is a short-term home loan that helps you bridge the gap between when you buy your new home and when the finances from selling your original house come in. You can usually borrow up to 80% of your original home’s value, and the term is six months to one year. You may prefer a bridge loan if you want a shorter-term second loan so you don’t have two make two mortgage payments for a long time.

Your choice between a piggyback loan and other options will probably come down to your finances and the cost of houses in your area. 

Laura Grace Tarpley, CEPF

Editor, Banking & Mortgages

Laura Grace Tarpley is an editor at Insider, responsible for banking and mortgage coverage on Personal Finance Insider. She covers mortgage rates, refinance rates, lenders, bank accounts, and borrowing and savings tips. She is also a Certified Educator in Personal Finance (CEPF). Before joining the Insider team, she was a freelance finance writer for companies like SoFi and The Penny Hoarder, as well as an editor at FluentU. You can reach Laura Grace at ltarpley@insider.com.
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