Piggyback Loans Explained

It might be difficult to save up for a house purchase’s down payment, especially if you’re aiming for the 20% down payment that will prevent you from having to pay for PMI. A piggyback loan may be a viable choice if you lack the funds for a significant down payment. 

Essentially, a piggyback loan is a second mortgage taken out on the same piece of land. It’s most commonly utilized to reduce up-front mortgage expenses such as a down payment as well as private mortgage insurance, both of which are normally required by lenders for the primary loan. These loans do come with their own set of costs and disadvantages, though. Everything you need to understand is detailed below.

What Exactly Are Piggyback Loans?

A piggyback mortgage refers to any second mortgage or loan taken out by a borrower that is secured by the same property as the primary mortgage. It is most commonly used to reduce up-front mortgage expenses such as a down payment or private mortgage insurance, which is required by many lenders for the primary loan.

With a piggyback loan, PMI premiums are not required (PMI). In addition, this setup can be used to get around certain jumbo loan prerequisites: The transaction could be structured as two mortgages, allowing you to avoid the “jumbo” category.

How Do Piggyback Loans Work?

Piggyback loans operate as follows: Typically, a mortgage will cover around 80% of the price of a home. However, instead of putting down the remaining 20% in cash, you obtain a second loan, often at 10%, and then put down the remaining 10% in cash.

Consider the following scenario: you have $20,000 saved but need to buy a home that costs $200,000. A mortgage of $160,000 (80% of the purchase price) might be obtained using the piggyback loan technique. You would then borrow an additional $20,000 (or 10%) via a “piggyback” loan. Last but not least, you’ll make a 10% down payment totaling $20,000.

The plan is to get both loans at once. Your complete borrowing needs can be satisfied by taking out two loans, the first being the larger amount and the second being a smaller loan, such as a home equity loan or line of credit (HELOC) with a draw duration of 10 years.

You are not required to choose the same lender for both loans. If you let your main mortgage lender understand you intend to take out a piggyback loan, they will put you in touch with someone who can help you out.

Types of Piggyback Loans

1. Down Payment Mortgages. Piggyback mortgages, also known as down payment mortgages, are a sort of second mortgage that provide borrowers with funding for a down payment on a home. The usage of funds obtained out of a down payment assistance program is often required in order for a lender to approve a second mortgage. It is necessary to reveal to the first loan company any and all kinds of down payment cash that will be utilized in the process of acquiring a mortgage.

2. Second Mortgages. In most cases, a borrower will only be eligible for a second mortgage provided the subordinated amount of collateral that they want to use has some amount of home equity in it. The price that a person has spent for their house is the primary factor that determines how much equity they have in their home. The appraisal value of the home is subtracted from the total amount still owed on the mortgage to arrive at this figure. The two most common types of second mortgages are the home equity loan and the home equity line of credit. Equity in the home is used as collateral for two types of home loans: the home equity loan and the home equity line of credit.

3. Home Equity Lines of Credit. A non-revolving credit loan is what is typically meant when people talk about home equity loans. A borrower can get the equity worth of their house as initial payment in the form of a lump sum when they take out a normal home equity loan. After then, the loan would normally call for payments to be made on a monthly basis based on the credit conditions that have been set by the lender. Borrowers use home equity loans for a variety of reasons, including paying for their children’s college education, making modifications to their own homes, consolidating existing debt, or meeting urgent financial obligations.

4. Home Equity Loans. A home equity line of credit (HELOC) is a revolving line of credit that allows the borrower to have more financial leeway. The borrower’s home equity is used to determine the maximum amount of credit available in this account. In a revolving account, the outstanding balance fluctuates according to the borrower’s purchases and payments. Interest is added to the outstanding balance of a revolving account every month. Each month, homeowners who have a home equity line of credit receive a statement outlining their account activity and the minimum payment required to maintain their good standing on their accounts.

Piggyback Loans: Pros and Cons

There are pros and cons to taking out a piggyback loan, so it’s up to you to decide if it’s the best option for you.

Pros

1. Avoid PMI at all costs. When you take out a piggyback loan, the combined loan-to-value ratio (LTV) of all your loans will never go above 80%, so you won’t have to pay PMI

2. Keep away from jumbo mortgages. There are more stringent standards to qualify for a jumbo mortgage and the interest rates are generally higher.

3. Reduced down payment. Piggyback loans allow you to buy a home without waiting for a 20% down payment, which is useful if you’re afraid of losing out on the market because of rising prices.

4. Reduced interest rates. A 75/15/10 piggyback mortgage can be used to avoid the higher interest rates that are normally associated with higher LTV properties, such as condominiums.

Cons

1. It’s more difficult to qualify. It’s more difficult to get authorized for a piggyback loan since lenders want to see that you have a modest debt load in relation to your income.

2. A PMI policy may be cheaper than a piggyback loan. PMI is an additional expense, but so is a second mortgage payment. In some cases, the monthly payment for your secondary loan could be more than the PMI you’d have to pay on your primary loan.

3. The final price tag doubles. When you take out two loans, you have to pay closing expenses for both of them. Even though the closing expenses for a HELOC are often smaller than those for a conventional mortgage, they can still add an additional 2% to 5% to the overall cost of the loan.

4. There may be some difficulty in obtaining a refinancing. When refinancing a piggyback loan, the second mortgage lender’s consent is required. If the lender of the piggyback loan does not agree to the refinancing of the principal mortgage, it could cause problems.

Alternatives to Piggyback Loans

In case you’re still undecided about whether or not a piggyback loan is the smartest method to go, here are some other possible financing strategies to explore.

• Low down payments are possible with a government-backed loan. For example, with an FHA loan, the down payment is as little as 3.5%, however, mortgage insurance is still required. If you satisfy the qualifications, you can get a VA or USDA loan with no down payment.

• First-time homebuyers may be eligible for grants or other aid to reduce the size of their first investment in a home through a down payment assistance program. If this were the case, you probably wouldn’t need to worry about saving enough money or paying for private mortgage insurance.

• With a jumbo mortgage, you can borrow more than the conforming loan maximum without having to take out two loans. Even though you’d be getting a jumbo loan with higher interest rates, it could end up being cheaper and more convenient than other options.

Bottom Line

A second mortgage that is taken out in addition to the initial mortgage loan is known as a “piggyback” mortgage. There is a wide range of options, including a mortgage for the down payment, a second mortgage, a home equity loan, and a home equity line of credit (HELOC). You might also utilize one of these loans to get out of paying private mortgage insurance (PMI) by getting something called an “80-10-10” piggyback mortgage.