What is a Piggyback Loan?

A piggyback loan combines two mortgages for the purpose of buying or refinancing a home. Borrowers often use piggyback mortgages to avoid paying private mortgage insurance on a conventional loan when putting down less than 20%. They can also leverage piggyback loans to reduce their down payment or buy a higher-priced home.

But while piggyback financing can be a unique strategy when buying a home, it does come with risks. Before pursuing a piggyback loan, learn how this type of financing works and whether it fits your situation.

How do piggyback loans work?

Piggyback loans are a way to buy or refinance a home using two mortgages simultaneously. The first, or primary mortgage, covers the bulk of the total borrowed amount, while the second mortgage finances a smaller portion. The second mortgage, or junior loan, is typically a home equity loan or home equity line of credit (HELOC) that uses the property as collateral.

Homebuyers sometimes use piggyback home loans as a workaround to a 20% down payment. Typically, borrowers will have to pay for private mortgage insurance (PMI) if they put down less than 20% on a home purchase. When using piggyback financing, the second mortgage fills in the remaining down payment amount, allowing the borrower to avoid the extra fee.

In addition to avoiding PMI, some borrowers leverage piggyback loans to purchase a home that’s priced above conforming loan limits. By spreading the cost of the home across two separate loans, they can avoid the higher interest rates and stricter guidelines of a jumbo loan.

Are piggyback loans a good idea?

In our example, the buyer pays $36 less each month with an 80-10-10 piggyback loan. In addition to having a slightly lower monthly payment, they’ll also build home equity faster, since their payment goes entirely to principal and interest. In contrast, with the single loan, a portion of their payment will cover PMI.

However, monthly savings are only one of the things to consider when deciding whether a piggyback loan is a good idea. Many factors will determine which path provides the better deal, including the primary mortgage type, your credit score, the interest rate on each mortgage, closing fees and the total borrowing costs of each loan option.

Types of piggyback loans

When taking out a piggyback loan, the second mortgage is typically a home equity product.

• Home equity loan: A home equity loan is a fixed-rate installment loan against a property’s equity. When used as a piggyback loan, the home equity loan serves as a down payment for the primary mortgage. Home equity loans typically have fixed monthly payments and repayment terms ranging from five to 30 years.
• Home equity line of credit: A HELOC is similar to a home equity loan, except it works much like a credit card. When using a HELOC for piggyback financing, borrowers can reuse the credit line after paying it off — as long as the HELOC is still within the draw period. HELOCs have variable interest rates and monthly payments, but their rates are typically lower than home equity loans.

See current home equity loan rates and top lenders today.

How piggyback loans are structured

→  80-10-10 piggyback loan: The first mortgage finances 80% of the purchase price, the second mortgage covers 10% and you put down another 10%.

→  80-15-5 piggyback loan: Similar to above, the primary mortgage covers 80% of the purchase amount, the second mortgage finances 15% and you put down 5%.

→  80/20 piggyback loan: With this structure, the first mortgage finances 80% of the home price, and the second mortgage covers 20%, meaning you finance the entire purchase without making a down payment. 80/20 mortgages were popular in the early to mid-2000s, but are less common today.

Adjust your piggyback percentages to fit your finances

You can tailor the percentages of the primary mortgage, piggyback loan and down payment to meet your needs. For example, if you’re using a piggyback loan to avoid a jumbo loan, your percentages may be less cut and dry than the above options.

How to get a piggyback loan

Pursuing a piggyback loan requires extra work when buying a home because you’re applying for and closing on two loans simultaneously. Here’s what to expect from the process:

Step 1: Explore and compare lenders.

You may be able to finance both your first and second mortgages with the same lender. In fact, some lenders offer a discount for borrowing both loans with them, but you may find a better deal using separate lenders. Compare interest rates, APRs, fees and loan terms between multiple lenders to see which option meets your needs and gives you the best deal.

Step 2: Note the qualifications of each loan.

The minimum requirements will differ between the primary and second mortgages. For example, lenders typically require a 620 credit score for a conventional mortgage, while piggyback loan lenders may require a 660 or 680 score. The two loans may also have different debt-to-income ratio thresholds and other unique requirements. Familiarize yourself with the two sets of qualifications to be sure you meet them both.

Step 3: Apply for your first mortgage.

You’ll apply for both loans simultaneously, but securing your first loan is a priority since you can’t get the piggyback loan without it. You’ll follow your lender’s requirements for the application and underwriting processes.

Step 4: Apply for your second mortgage.

Whether you end up financing both loans with two separate mortgage lenders or the same one, you’ll submit your second mortgage application while securing your first mortgage. If you’re working with a single lender, the loan process will be somewhat streamlined since they already have the necessary information. If you’re financing the piggyback loan with a separate bank or mortgage company, expect to provide both lenders with your personal and financial information.

Step 5: Prepare for closing.

After both loans are approved, you’ll enter the underwriting phase and go through a home appraisal, inspection and other steps. You’ll also need to ensure your down payment and closing costs funds are ready. Each lender may request additional information or documents throughout the mortgage process. Respond promptly to each request to ensure a smooth closing on both loans.

4 reasons to get a piggyback loan

Piggyback loans can help buyers accomplish strategic goals when buying a home. Here are a few ways to leverage piggyback financing:

1. To avoid mortgage insurance. As we covered earlier, you can leverage a piggyback loan to avoid paying for PMI if you’re putting down less than 20% on a conventional loan. Instead of directing a portion of your monthly payment to fees, you’ll put it toward the second loan’s principal and build home equity faster.
2. To avoid a jumbo loan. A piggyback home loan can help you purchase a house above conforming loan limits without borrowing a jumbo loan with higher interest rates and stricter requirements. The primary mortgage remains within conforming loan limits, while the rest of the purchase price is shared between the second mortgage and your down payment.
3. To reduce your down payment. A piggyback loan can reduce your out-of-pocket down payment. This strategy can help you buy a home without draining your savings, or allow you to purchase a more expensive home without contributing a hefty down payment amount. This way, you can hold on to your cash for emergency savings or other financial goals.
4. To secure short-term financing. If you’re expecting funds in the near future that you plan to use toward your home purchase (for example, if you’re waiting for a bonus or selling another property), you can use a piggyback home loan to temporarily fund the purchase. Once the funds come through, you can immediately pay off the second mortgage.

Pros and cons of piggyback loans

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Piggyback loan alternatives

A piggyback mortgage is one way to work around a 20% down payment — but there are other options that can help you purchase or refinance a home with less money down.

→  FHA loans. With an FHA loan, which is a mortgage backed by the Federal Housing Administration (FHA), you can buy a home with as little as 3.5% down. You’ll pay an upfront FHA mortgage insurance premium and ongoing mortgage insurance each year, but you’ll avoid the higher interest rate and second monthly payment attached to piggyback financing.

 See current FHA loan rates today.

→  97% loan-to-value conventional loans. Some nongovernment mortgages allow down payments as low as 3%. Many of the loans also come with reduced mortgage insurance rates. Ask your lender about the options available to you. However, depending on the loan program, you may need to be a first-time homebuyer or meet income guidelines.

 See current mortgage rates today.

→  Down payment assistance grants and forgivable loans. Some down payment assistance programs provide grants or forgivable second mortgages if you remain in the home for a certain amount of time.

→  USDA loans. If you’re purchasing a home in a rural area, you may qualify for a USDA loan, which is a mortgage from the U.S. Department of Agriculture (USDA). These zero-down loans are aimed at low- and moderate-income borrowers.

→  VA loans. Loans backed by the U.S. Department of Veterans Affairs (VA), known as VA loans, allow veterans, active-duty service members and eligible surviving spouses to purchase a home with 0% down.

 See current VA loan rates today.