February 23, 2020

What is a Piggyback Loan?

A piggyback mortgage loan is a home equity loan or home equity line of credit (HELOC) issued to a home buyer simultaneously with a conventional mortgage. It allows borrowers to make less than a 20% down payment without having to pay for private mortgage insurance (PMI).

How does a piggyback loan work?

Let’s say a home buyer only has 10% of the purchase price in savings for the home they want. They have the option of applying for a first mortgage to cover 90% of the home’s value, but that would require them to pay for expensive private mortgage insurance.

Instead, the home buyer could choose to take out a second loan to cover the other 10% of the down payment and avoid paying for PMI. This type of piggyback loan, known as an 80/10/10 loan, is most common. But some borrowers may qualify for an 80/15/5 loan, which only requires the home buyer to pay a 5% down payment.

Is it better to pay PMI or get a second mortgage?

That depends on certain factors, including your credit score. Often, a piggyback second mortgage comes with a higher interest rate, but the borrower may still spend less than they would on private mortgage insurance.

In other cases, the interest rate and total closing costs will drive up the cost of a piggyback loan even higher than the cost of private mortgage insurance on a primary mortgage. Calculate your total monthly mortgage payments for both scenarios before you decide which option is best for you.

Also, keep in mind that piggyback loans can make it difficult to refinance down the road.

How do you qualify for a piggyback loan?

You’ll need good credit to qualify for a piggyback loan. You’ll most likely need a credit score above 680 to be eligible, but the minimum can vary by lender. You can also consider other alternatives.

Alternatives to piggyback loans

There are a few other alternatives that also allow you to get a mortgage loan with no PMI.
  • Take out an FHA loan. You can get a mortgage with as little as 3.5% down, but you’ll pay mortgage insurance premium fees that may be more costly than PMI.
  • Explore down payment assistance programs. If you meet the income requirements and you’re a first-time home buyer, you may be eligible for a grant that doesn’t need to be repaid.
  • Check out home co-investments. Programs like Unison HomeBuyer allow you to double your 10% down payment so you can get a conventional mortgage without paying PMI. It’s not a loan, but rather an investment in the value of your home; Unison receives a share in the appreciation (and, in most cases, the depreciation) of your home when you sell it - up to 30 years later.

Be sure to carefully consider all your options and the associated costs before making a decision about your financing strategy.