Last Updated on September 16, 2023 / Home Ownership, Loans
When it comes to financing a home purchase, potential homeowners have several options to choose from. One of these options is a piggyback mortgage. Piggyback mortgages, also known as combo loans or 80-10-10 loans, offer an alternative approach to traditional mortgage financing. In this article, we’ll explore what piggyback mortgages are, how they work, why someone might consider getting one, provide examples, and discuss the pros and cons associated with this unique mortgage strategy.
Contents
- What is a Piggyback Mortgage?
- Other Names for Piggyback Mortgages
- How Does a Piggyback Mortgage Work?
- Why Would Someone Get a Piggyback Mortgage?
- Examples of Piggyback Mortgages
- Pros and Cons of Piggyback Mortgages
- Conclusion
What is a Piggyback Mortgage?
A piggyback mortgage is a creative financing technique that involves taking out two separate loans to purchase a home instead of a single mortgage loan. The primary purpose of a piggyback mortgage is to avoid paying private mortgage insurance (PMI), which is typically required for conventional loans when the down payment is less than 20% of the home’s purchase price.
Other Names for Piggyback Mortgages
A piggyback mortgage can also be called an 80-10-10 mortgage, a home equity loan, or a home equity line of credit (HELOC).
How Does a Piggyback Mortgage Work?
Piggyback mortgages work by combining two loans to cover the cost of a home purchase:
- First Mortgage (80% of the purchase price): This is the primary mortgage loan that covers 80% of the home’s purchase price. It functions as the main loan and often comes with a lower interest rate compared to the second mortgage.
- Second Mortgage (10% of the purchase price): The second mortgage is typically a home equity loan or a home equity line of credit (HELOC) that covers 10% of the home’s purchase price. This loan has a higher interest rate than the first mortgage.
- Down Payment (10% of the purchase price): The borrower is required to make a down payment of at least 10% of the home’s purchase price, which is usually paid upfront.
Why Would Someone Get a Piggyback Mortgage?
There are several reasons why someone might consider getting a piggyback mortgage:
- Avoiding PMI: Piggyback mortgages allow borrowers to avoid paying private mortgage insurance, which can add significantly to the monthly mortgage payment.
- Lower Monthly Payments: Since the primary mortgage covers 80% of the home’s purchase price, it often comes with a lower interest rate and lower monthly payments compared to a jumbo loan or other financing options.
- Smaller Down Payment: Borrowers can make a smaller down payment (usually 10% of the purchase price) compared to the traditional 20% down payment required for conventional mortgages.
Examples of Piggyback Mortgages
Let’s consider an example to illustrate how a piggyback mortgage works:
- Home Purchase Price: $300,000
- Down Payment: 10% ($30,000)
- First Mortgage (80%): $240,000 at a 30-year fixed interest rate of 3.5%
- Second Mortgage (10%): $30,000 at a 15-year fixed interest rate of 5%
In this example, the borrower uses a piggyback mortgage to purchase the home. The first mortgage covers 80% of the purchase price, and the second mortgage covers the remaining 10%. By splitting the financing in this way, the borrower avoids PMI and may enjoy lower monthly payments.
Pros and Cons of Piggyback Mortgages
Pros:
- No PMI: The primary benefit of a piggyback mortgage is the ability to avoid paying PMI, which can save borrowers money over the life of the loan.
- Lower Monthly Payments: The first mortgage typically comes with a lower interest rate, resulting in lower monthly payments compared to other financing options.
- Smaller Down Payment: Borrowers can enter the housing market with a smaller down payment, making homeownership more accessible.
Cons:
- Higher Interest Rate on the Second Mortgage: The second mortgage usually carries a higher interest rate than the first mortgage, which can increase the overall cost of borrowing.
- Complex Financing Structure: Piggyback mortgages involve two loans, making the financing process more complex and potentially confusing for some borrowers.
- Risk of Default: Having two loans increases the financial burden on the borrower, which can be risky if their financial situation deteriorates.
Conclusion
Piggyback mortgages offer an alternative approach to traditional mortgage financing, allowing borrowers to avoid PMI and make a smaller down payment while keeping monthly payments manageable. However, they come with a higher interest rate on the second mortgage and a more complex financing structure. Before deciding on a piggyback mortgage, it’s essential to carefully consider your financial situation and explore all available mortgage options to make an informed decision that aligns with your long-term homeownership goals. Consulting with a mortgage professional can also provide valuable guidance in choosing the right financing strategy for your specific needs.
Featured Image Credit: Deposit Photos
FAQs
One of the most common reasons to get a piggyback loan is to avoid paying private mortgage insurance (PMI), which protects the lender from default. It's cheaper for the homeowner to get two mortgages, and the interest is usually tax deductible.
What is piggyback in mortgage? ›
A “piggyback” second mortgage is a home equity loan or home equity line of credit (HELOC) that is made at the same time as your main mortgage. Its purpose is to allow borrowers with low down payment savings to borrow additional money in order to qualify for a main mortgage without paying for private mortgage insurance.
How do you qualify for a piggyback loan? ›
Piggyback mortgage requirements
You still need a strong credit score: about 700 or higher, though some lenders might offer them to people with scores as low as 680. It's wise to reduce your debt-to-income (DTI) ratio as much as possible before applying, too.
Why are piggyback mortgages also known as 80 10 10 mortgages? ›
A piggyback loan — also called an “80/10/10 loan” — uses two separate loans to finance one home purchase. The first loan is a conventional mortgage that typically covers 80% of the home price. The other loan is a second mortgage (usually a HELOC) that covers 10 percent.
What's the most common ratio for borrowers who use split or piggyback mortgages? ›
The most common ratio for borrowers who use split, or piggyback, mortgages is 80/10/10. This ratio entails getting a primary mortgage for 80% of the home's value, taking a second mortgage for 10%, and making a down payment of the remaining 10%.
What are 3 factors that can affect the terms of a loan for a borrower? ›
Here's what they are.
- The amount you borrow. The amount of money that you borrow plays a huge role in how much you pay each month and over time. ...
- Your interest rate. Interest rate also impacts the monthly payments and total costs you'll face when you're repaying your personal loan. ...
- Your loan repayment term.
Yes, piggybacking also known as becoming authorized user can help you build credit. But before asking just anyone if you can become an authorized user, the type and standing of the accounts are extremely important.
How do you explain piggyback? ›
If you give someone a piggyback, you carry them high on your back, supporting them under their knees. They give each other piggyback rides. If you piggyback on something that someone else has thought of or done, you use it to your advantage.
What is the advantage of a piggyback loan? ›
The Advantages of a Piggyback Mortgage
The amount you have to pay for PMI varies based on the size of your loan. Typically, it's between 0.3% and 1.5% of the loan value. And when you go with a piggyback mortgage, the PMI rules don't apply, so it doesn't factor into your monthly mortgage payment calculation.
What is an example of a piggyback loan? ›
A piggyback mortgage is any additional loan taken out on a property alongside a first mortgage. Examples include second mortgages, home equity loans, and HELOCs. Piggyback mortgages are used to help with covering down payments on a property or to avoid paying PMI.
Some homebuyers use a piggyback mortgage to avoid paying private mortgage insurance, which is often required by lenders if the down payment on the loan is less than 20%. FHA loans generally only require a 3.5% down payment on the purchase price, so a piggyback mortgage is not typically necessary.
Can you refinance a piggyback loan? ›
Finally, people who can switch from a variable interest rate to a fixed-rate might want to refinance their second mortgage. This is very common with piggyback loans.
What is the 80% rule for HELOC? ›
HELOC Loan Limits
Most lenders will let you borrow up to 80% of your equity, or $80,000 for every $100,000. Some will let you borrow up to 90%. If you don't have excellent credit, you may not be able to borrow as much.
What is the 80% mortgage rule? ›
Even if you don't have a 20% down payment, you can avoid the cost of private mortgage insurance (PMI) with an 80-10-10 loan. You take out a primary mortgage for 80% of the purchase price and a second mortgage for another 10%, while making a 10% down payment.
What is not a good reason to refinance? ›
Key Takeaways
Don't refinance if you have a long break-even period—the number of months to reach the point when you start saving. Refinancing to lower your monthly payment is great unless you're spending more money in the long-run.
Why might a borrower take a piggyback loan quizlet? ›
Why might a borrower take a piggyback loan? To limit the cash necessary to bring to the table. A borrower may take on a piggyback loan to avoid mortgage insurance, but not "MIP," because that is required for FHA loans.
What is the benefit of a split loan? ›
By splitting your home loan into two, one fixed and the other variable, you can enjoy the benefits of both sides while lessening the risk and effect on each option. In particular, a split mortgage offers: Security: The fixed rate portion of the loan allows you to manage the risk of interest rate fluctuations.
Why have a split loan? ›
While there are pros and cons to both fixed rate and variable rate home loans, a split loan allows you to hedge your bets and tailor your home loan in a way that works best for you and your financial goals.
What is a piggyback loan Quizlet? ›
A piggyback loan is most often used: As a bridge from one property to the next. In the event a borrower is upside down on his/her loan. To finance home improvement projects.
