- 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.
As home prices rise — and down payment requirements with them — more and more buyers are turning to piggyback mortgages, a doubled-up financing method used to boost your down payment, avoid private mortgage insurance, and get better terms on your mortgage.
But this move isn't for everyone. Here's what to know about piggyback loans and how to use them.
What is a piggyback mortgage?
Piggyback loans are one of many financing strategies for homebuyers. They involve taking out two mortgages, one large and one small, in an effort to improve one's down payment and mortgage terms.
Definition and how the financing structure works
Here's how piggybacking works: The smaller mortgage "piggybacks" on the larger one. The primary loan is a conventional mortgage. The other is typically 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.
"At 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."
How piggyback mortgages work
There are several types of piggyback loans, and their main differences come down to math. The most common type is the 80-10-10 loan. With this option, 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.
There is also the 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%.
Finally, there's a 75-15-10 loan, which is most often used for condominiums. This is because interest rates on condos are higher when you have to borrow more than 75% of the purchase price.
The roles of the first and second mortgages
Piggyback mortgages are second mortgages. This means they come second in line to your first mortgage if you fail to make payments.
For example, if you fail to make your payments and get foreclosed on, the lender on your first mortgage has dibs on the proceeds from selling your home first. Only after that first loan balance is settled will your piggyback lender get repaid (if there's anything left).
Benefits of using a piggyback mortgage
There are many advantages to using a piggyback mortgage when buying a home. These include:
Avoiding private mortgage insurance (PMI)
One of the biggest perks of piggyback loans is that you're avoiding PMI. With piggyback loans, you're able to pad your down payment to get up to 20%, which allows you to skip PMI on conventional mortgages. According to Freddie Mac, PMI typically costs between $30 to $70 per month for every $100,000 you borrow.
Potentially lower overall monthly payments
A bigger down payment will usually qualify you for better mortgage terms, including a lower interest rate. This — when combined with the lack of PMI — can end up meaning significantly lower monthly payments.
Considerations and risks
Despite the perks of piggyback loans, they're not for everyone. Here are the drawbacks you might want to consider before using this financing strategy:
Higher interest rates on the second mortgage
Interest rates are often higher on second mortgages, so this could increase your total interest costs. They also may be adjustable — particularly on HELOCs. This could make it hard to predict and cover your monthly payments down the line. "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."
The challenge of managing two mortgage payments
Piggback loans also mean 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.
Who should consider a piggyback mortgage?
Whether you should use a piggyback mortgage depends on your financial situation and the market you're buying in. Here's who may want to consider one:
Homebuyers with strong credit but less cash for a down payment
If you have good credit but not a lot in savings, a piggyback mortgage may be a good option, as it can pad your down payment and help you avoid PMI costs. Also, thanks to your strong credit, you should be able to secure good terms and an affordable rate on the loan.
Buyers in competitive real estate markets
If you're in a hot real estate market, a piggyback mortgage may be able to help you stand out from other buyers. You can use the funds to increase your down payment (and overall price offer), make a bigger earnest money deposit, or both.
How to qualify for a piggyback mortgage
Piggyback mortgages are a type of second mortgage, so they're a little riskier for lenders. Because of this, qualifying for secondary mortgage loans and piggybacks is typically harder and may come with higher interest rates.
Credit score and debt-to-income ratio requirements
You'll need a good credit score to get a piggyback loan or any type of second mortgage, for that matter. The exact score depends on the lender you choose, but expect to need a 680 or higher.
You will also need a debt-to-income ratio of 36% or less in most cases. This means your total monthly debts — including your mortgage payment and the payment on your piggyback mortgage — comes to no more than 36% of your monthly earnings.
The importance of lender comparisons
Qualifying requirements will vary by lender, so it's important to shop around if you're worried about eligibility. Comparing piggyback mortgage rates between lenders is smart, too, as it can help you secure the lowest-cost loan possible.
Alternatives to piggyback mortgages
Piggyback mortgages aren't the only option if you don't have much for a down payment. You can also explore:
Lender-paid mortgage insurance (LPMI)
In some cases, your lender may cover the costs of your mortgage insurance, particularly if the mortgage market in your area is competitive. Just be careful: In most cases, they'll work these costs into your loan elsewhere, usually with a higher interest rate.
Government-backed loan programs
Not all loan programs require mortgage insurance, so if you have a small down payment, consider one of these. With USDA loans, for example, borrowers need zero down payment and there are no mortgage insurance requirements (though you do need to buy in a rural area). The same goes for VA loans, which are for veterans and military service members.
FAQs
Piggyback mortgages help increase your down payment. If you can reach a 20% down payment, you'll eliminate the need for PMI and significantly lower your monthly payment.
Generally, yes, the second mortgage has a higher interest rate because it is considered riskier by lenders. It takes a subordinate position to your first mortgage if you default on your loan.
Not all lenders offer piggyback mortgages, so start by finding a few that do. Then, ask about their qualifying requirements and see if you're eligible.
Piggyback mortgages can result in higher overall interest costs (they typically come with higher rates than traditional mortgages). They can also cause financial stress, as they require managing not just one monthly mortgage payment but two.
There are several refinancing considerations for piggyback loans. First, refinancing can be more challenging, as you're borrowing more of your home's equity. If your home's value drops, you may not have enough equity left to refinance (most lenders require 20%). You will also need to consider if you want to refinance just your piggyback loan, your main mortgage, or both. If you want to refinance both and roll them into the same loan, you will also need a good amount of equity on hand.
