A piggyback loan (aka second trust loan) is using two loans to finance the purchase of one house with less than 20 percent equity. The most common piggyback mortgage is an 80/10/10 loan. You’ll borrow 80 percent of the purchase price with a first loan, 10 percent with a second loan, and provide a 10 percent down payment.
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What Is a Piggyback Loan?
A piggyback loan is exactly like it sounds: one loan piggybacks on the other one. There is one main loan, one smaller loan (usually in the form of a home equity line of credit or HELOC), and the remainder is made up of the borrower’s down payment. The piggyback loan works by combining both of the loans to equal greater than 80 percent of the loan to value (LTV).
It’s often used to avoid private mortgage insurance (PMI), which is charged when borrowers don’t bring in a 20 percent down payment. It’s also used to potentially qualify for a lower interest rate and stay under the jumbo loan limit. Piggyback loans aren’t as easy to find as they were prior to the recession because some lenders see them as being higher risk. Getting a piggyback loan may require two different lenders coming together to form one piggyback loan.
Piggyback loans (the most popular is an 80/10/10 loan) consist of three parts:
- Large First Loan (80 percent): You’ll get a first loan for 80 percent of the purchase price of the property.
- Smaller Second Loan (10 percent – 15 percent): You’ll get a second loan (aka a second trust loan) for 10 percent to 15 percent of the purchase price of the property, often in the form of a HELOC.
- Small Down Payment (5 percent – 10 percent): You’ll need to provide a down payment of 5 percent to 10 percent, which covers the remaining amount of the purchase price.
Piggyback loans can be a viable option for borrowers who want to avoid paying for private mortgage insurance (PMI) or stay below the jumbo loan limits to get a better interest rate. However, keep in mind that you’ll typically make interest only payments on the second trust loan. This means you could be getting yourself into more debt than you can really afford.
If you can’t afford to make principal and interest payments on both loans, it might be better to wait until you can afford to do so or choose a house in a lower price range. Even if you only have to make interest only payments on the second loan, eventually you’ll need to start making principal payments. You need to make sure you can do so when the time comes.
80/10/10 Piggyback Mortgage
An 80/10/10 mortgage is the most common type of piggyback loan offered by mortgage lenders. This means you’re borrowing 80 percent of the purchase price with a first loan, borrowing another 10 percent with a second loan, and bringing 10 percent to the table with a down payment. Lenders prefer this over other piggyback mortgage options because you have more money invested.
80/10/10 loans are typically set up in three parts:
- The First Part of the 80/10/10 Loan: This typically acts like a conventional loan, and you’ll borrow 80 percent of the purchase price. It’s generally a fixed rate loan, starting at prime rate, and is based on the borrower’s credit score and current interest rates.
- The Second Part of the 80/10/10 Loan: The second loan is typically a HELOC, and you’ll borrow 10 percent of the purchase price. You’ll typically receive a 25-year term, although the term varies by the lender offering the piggyback loan. For the first five to ten years of the term, the payments are usually interest only, and then include interest and principal during the remainder of the term.
- The Third Part of the 80/10/10 Loan: The third part is your down payment, which will equal 10 percent.
For example, assume you want to use a piggyback loan to purchase a property for $300,000. Your first mortgage will be $240,000, your second trust mortgage will be $30,000, and your down payment will be $30,000.
Keep in mind that the second part of the loan is more complicated; it is generally a much smaller amount intended to be added to the first loan in order to avoid paying PMI. These HELOCs typically have variable or adjustable rates, so be prepared for your rates and thus your monthly payments to go up.
You can use an ARM calculator to figure out what your monthly payments will be and how much total interest you paid over the duration of the 80/10/10 loan.
80/15/5 Piggyback Mortgage
An 80/15/5 mortgage is another type of piggyback mortgage, and it works very similar to an 80/10/10 loan. How it’s different is that the second loan is higher (15 percent versus 10 percent) and the down payment is lower (5 percent versus 10 percent). Since the down payment is smaller, this type of piggyback mortgage isn’t offered as frequently by lenders and requires a high FICO score.
80/15/5 loans are also typically set up in three parts:
- First Part of the 80/15/5 Loan: Typically, the first mortgage will be a fixed rate 30-year mortgage with a competitive prime rate. As with an 80/10/10 loan, you’ll borrow 80 percent of the purchase price with the first loan and you’ll make principal and interest payments.
- Second Part of the 80/15/5 Loan: The second part of an 80/15/5 loan is usually a HELOC for 15 percent of the purchase price. You’ll likely receive a 25-year term with an interest only period, followed by interest and principal payments for the remainder.
- Third Part of the 80/15/5 Loan: The last number in the 80/15/5 loan is the percentage of your down payment, which is 5 percent of the purchase price.
Let’s look at the same example as in the 80/10/10 loan section above. Let’s assume you purchase a home for $300,000 and want to know how much you need to put down. Well, your first loan will be $240,000, your second loan will be $45,000 and your down payment will be $15,000.
Keep in mind that the amount of adjustment for the HELOC loan (the second loan) depends on if rates go up or down, the type of loan and the lender’s cap rate. Because of the adjusting rates, piggyback loans can be risky if rates rise, which will then also increase your monthly mortgage payments.
What Is Private Mortgage Insurance (PMI)?
To understand why you might want a piggyback loan, it’s helpful to know what PMI is. It’s a type of mortgage insurance payable to a lender if you default on your loan. PMI is provided by private insurance companies to protect the lender’s financial interest in your property. The premium is paid by you, the borrower, as a part of your monthly mortgage payment.
PMI is typically required when:
- You put less than 20 percent down as a down payment when using a conventional loan, with the exception of a VA loan.
- Your equity is less than 20 percent of the value of your home.
You pay a monthly PMI premium as part of your mortgage payment until you have 20 percent equity in your home. This is either achieved when you’ve made a set number of payments or when there’s enough market appreciation. However, there’s typically a waiting period of two years before you can drop the PMI due to market appreciation.
You need to decide if it’s better to pay for PMI for a couple years or pay for additional interest on your second piggyback loan. You’ll be building equity with every payment on a conventional loan. You won’t be building any equity on the second part of a piggyback loan for five to ten years, since you’ll make interest only payments. This means the total interest payments on a piggyback loan might exceed the total you pay for PMI over the life of a conventional loan.
Who a Piggyback Loan Is Right for
A piggyback loan is typically right for you if you’re struggling to come up with a large down payment, or if you want to avoid paying private mortgage insurance because your down payment is less than 20 percent. Piggyback loans are typically right for owner occupants and can sometimes also be used on vacation rental properties.
Additionally, some borrowers use piggyback loans when they’re buying property in expensive areas or purchasing luxury real estate. They do this because the sales price of the house often goes over the conforming loan limits. If they use a piggyback loan, they can avoid the often high interest rates and stringent qualifications associated with jumbo loans.
Piggyback Mortgage Rates, Terms & Qualifications
Piggyback mortgage rates, terms, and qualifications vary by lender. You can use a piggyback loan as a way to work with the stricter regulations associated with conforming mortgages post-recession. However, qualifying for a piggyback loan typically requires a higher FICO score than a conventional loan because your down payment is lower.
Piggyback Mortgage Rates, Fees & Terms
Piggyback mortgage rates, fees and terms typically are:
- Piggyback Loan Rates for First Mortgage: Typically 4.6 percent to 6 percent
- Piggyback Loan Rates for Second Mortgage/HELOC: 5.25 percent+ for the initial rate and then it typically adjusts annually
- Piggyback Mortgage Fees: Typical closing costs are 2 percent to 5 percent, but most lenders charge loan origination fees on both loans so you may end up paying 1 percent more
- Piggyback Loan Term for First Mortgage: Typically 30 years for the first loan
- Piggyback Loan Term for Second Mortgage: Usually 25 years for the second loan, with the first five to ten years as the draw period where you pay interest only, and the remaining years are the repayment years where interest plus principal is due
Keep in mind that most lenders offer the second mortgage of the piggyback loan in the form of a HELOC with an adjustable rate. This is often overlooked by borrowers, so be sure to read your mortgage documents and discuss possible rate increases with your lender as well as how the structure of your second loan works (because it varies among lenders).
For more information on adjustable rate mortgages, check out our in-depth guide to adjustable rate mortgages.
Piggyback Loan Qualifications
Piggyback loan qualifications typically are:
- Minimum FICO Score: 680+ (check your score for free)
- Minimum Down Payment: Typically 10 percent, but some lenders will accept 5 percent
- Employment History: Generally two+ years of steady work history
- Documentation: You will generally need to give documentation such as proof of income, tax returns, and bank statements twice (once for each loan)
- Cash Reserves: Typically lenders want to see three+ months of cash reserves
Piggyback loan qualifications vary by lender, but most lenders expect to see a high FICO score, a few months of cash reserves, and an overall strong financial standing. This is because lenders consider the low down payment as the borrower having “less skin in the game,” which is offset by strong qualifications in other areas. Basically, a lower down payment means it’s easier for the borrower to walk away or default on the loan if something goes wrong.
Piggyback Loan Lenders
Piggyback loans, considered to be specialty loans, aren’t offered by every lender. This means they’re not typically advertised by lenders alongside other rates such as investment property loan rates. After the recession of 2007/2008, there are fewer piggyback loan lenders, so you need to ask for piggyback loans specifically.
Here are five recommended piggyback loan lenders that currently offer piggyback loans in various states:
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Citywide Home Loans is a piggyback loan lender that offers piggyback loans as well as conventional loans, construction loans and VA loans. They lend in 35 states and typically offer 80/10/10 piggyback loans. You can apply online through their website, after which a loan representative will contact you with more details about their piggyback mortgage programs.
Santander Bank offers piggyback mortgages as well as conventional mortgage, refinances, and all of the services a traditional bank offers, such as credit cards and checking accounts. They lend nationwide. They offer an 80/10/10 piggyback loan that they call a combination loan. The first mortgage is a traditional mortgage, and the second mortgage is an adjustable rate HELOC.
You can get pre-qualified online and once you do, you can find out the rates and terms on their 80/10/10 loans.
NorthStar Funding is a mortgage broker that offers piggyback loans, conventional loans and refinances. They lend in 10 states plus Washington, D.C., and primarily lend in the New York, New Jersey, and Connecticut areas as well as a few other states. Like the other lenders on our list, they also offer an 80/10/10 piggyback loan program. Many of their second mortgages have balloon payments. Apply online and find out more details about the specifics of their 80/10/10 loans.
Quicken Loans is a nationwide, online lender that offers piggyback loans, refinances, fixed rate loans, jumbo loans and more. Their piggyback loans are in the form of an 80/10/10, where the 80 is the main loan and the 10 is a HELOC. You can apply online at the top of their home page and a loan representative will get back to you with more details about the types of piggyback loans they offer on their site.
Piggyback Loan Pros and Cons
A piggyback mortgage has some advantages, including being able to avoid the often costly additional monthly expense of private mortgage insurance, as well as avoiding the high rates of a jumbo loan. However, they also have their disadvantages, which include paying additional closing costs because you have two loans, and potentially purchasing a home you can’t really afford.
Pros of a Piggyback Mortgage
Some pros of a piggyback loan include:
- Avoiding Private Mortgage Insurance: If you’re a borrower who has less than 20 percent to use as a down payment, which means you save money by not paying the PMI.
- Use Your Cash for Other Purposes: You could use the money you saved by not paying PMI to invest in a rental property or a business.
- Purchase a Home You May Not Qualify for with a Conventional Mortgage: You may be able to buy the home you want but wouldn’t qualify for with a conventional mortgage. This is because your payment doesn’t include PMI, and so you may qualify for a higher principal balance.
- Tax Deductions: You can typically deduct the interest on both of the piggyback loans on your taxes.
For more information on interest deductions and property-related tax advantages, check out our in-depth guide on rental property tax benefits and deductions.
Cons of a Piggyback Mortgage
Some cons of a piggyback loan include:
- Additional Expenses: You will typically have to pay closing costs such as loan origination fees and other lender fees on two loans, instead of one loan.
- Purchasing a Home that You Can’t Afford: You may end up losing the home to foreclosure if you can’t pay the mortgage payments because the adjustable rate of the second loan may go up, thus increasing your monthly mortgage payments.
- You Pay More in Interest: The interest rate on the second mortgage is typically higher than the rate on a conventional mortgage, so you may end up paying more over the life of the loan. Plus, if your second loan isn’t amortizing (meaning you make interest only payments), you’ll pay interest on the full balance for longer, typically five to ten years.
- Difficult to Refinance: You may not be able to refinance the property because the second lender will have to agree to take second lien position to the new lien holder, or you will have to pay the second loan off entirely.
- A Long-Term Second Loan: The second loan doesn’t disappear until you pay it off, and your payment doesn’t go down when your LTV is less than 80 percent. This is unlike PMI, which goes away once the LTV goes below 80 percent of the home’s value (or you can ask your lender for an appraisal once the property has appreciated).
Piggyback Mortgage Frequently Asked Questions (FAQs)
In this section, we’re going to answer the most frequently asked questions about piggyback loans.
Below, we’re going to dive into some of the most frequently asked questions about piggyback loans:
What Is a Piggyback Loan vs. PMI?
Private mortgage insurance (PMI) is typically required on conventional loans when your down payment is less than 20 percent. The monthly premium is added to your payment. You can avoid paying PMI by choosing a piggyback loan instead, which is actually two loans. You’ll borrow 80 percent of the purchase price with the first and 10 percent to 15 percent with the second.
What Are Additional Ways to Avoid Paying Private Mortgage Insurance?
Piggyback loans are a viable option for avoiding the additional expense of PMI. However, they aren’t the only option. There are other ways to avoid PMI as well, such as putting down a larger down payment or purchasing a property that is undervalued and has equity in it already.
“Piggyback loans offer a way to avoid PMI, but over the last few years, alternatives have emerged that offer other more cost-effective ways to avoid PMI. Such options include a one-time buyout of the PMI at closing or loans that now go to 90 percent for a slightly higher rate but without any PMI.”
– Ralph DiBugnara, President, Home Qualified
What Is a Combo Loan?
A combo loan (aka combination loan) is when you get two loans to finance one real estate property. It’s the same as a piggyback mortgage. A common option is an 80/10/10 loan, where you take out a first mortgage of 80 percent, a second loan of 10 percent, and bring in a down payment of 10 percent.
What Is a Purchase Money Mortgage?
A purchase money mortgage is not the same thing as a piggyback mortgage. Instead, a purchase money mortgage is a loan issued by the seller of the property to the buyer. It’s similar to owner financing because the seller is assuming the role of the mortgage lender. The buyer and seller agree to the loan terms.
A piggyback loan is typically made up of two loans and is often used by a borrower if they don’t have a large enough down payment to avoid paying private mortgage insurance. PMI is often required by lenders when a borrower has less than a 20 percent down payment. A piggyback loan generally consists of one main loan, a secondary loan, and a down payment.
Finding the right lender for your property doesn’t have to be a headache. Fill out a short form on LendingTree and let lenders compete for your business. Their online marketplace lets you quickly compare rates, offers, and find a good fit. See your options in minutes.