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Piggyback Loans: What They Are and How to Use Them

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A piggyback loan allows you to take out two mortgages at once to buy or refinance a home. It can be a great tool to avoid paying for mortgage insurance or taking out a jumbo loan, but there are some drawbacks to consider.

What are piggyback loans?

“Piggyback loan” is a term used by lenders when referring to a borrower using two mortgages to finance a home. The first loan covers most of the borrowed amount, and a second mortgage is added for the total desired loan. Most borrowers choose a home equity loan or home equity line of credit (HELOC) for the second loan in a piggyback-loan scenario.

The second loan is “piggybacking” on the first mortgage, allowing you to borrow a higher percentage of your home’s value without needing mortgage insurance. You can also pick any combination of the first and second mortgage loan amount that fits your financial needs, although the second mortgage loan amount is usually smaller than the first mortgage amount borrowed.

THINGS YOU SHOULD KNOW If you need a quick refresher on the features of a home equity loan versus a HELOC, check out the table below:

Home equity loan features Home equity line of credit features (HELOC)
  • Funds are received in one lump sum
  • Rates are typically fixed
  • The payments are fixed for the life of the loan
  • Closing costs between 2% to 5% of loan amount
  • No prepayment penalties
  • No ongoing fees
  • Funds are received on a credit line
  • Rates are typically variable
  • The payments are based only on the amount drawn
  • Interest-only payment options may be available
  • Closing costs between 2% to 5% of the credit line
  • May have a prepayment penalty
  • May charge ongoing maintenance and membership fees
  • The draw period typically only lasts 10 years, after which the balance must be paid off in installments

5 reasons to get a piggyback loan

Savvy homebuyers are always looking for ways to save on their mortgage payments and piggyback loans may be a great way to do that. They also provide a short-term down payment solution if you don’t have the cash to put down 20% on a new home, but know you’ll have the resources to pay off the second mortgage in the near future. Five reasons to get a piggyback loan include:

  1. Avoiding mortgage insurance. You pay private mortgage insurance (PMI) to protect lenders against losses if you default on a conventional loan with less than a 20% down payment at closing. Getting a second mortgage to avoid PMI may be a good idea so you’re not shelling out money every month for insurance that only covers your mortgage company.
  2. Avoiding jumbo financing. If you’re buying a luxury home or need a loan for more than the $548,250 maximum conforming loan limit (commonly known as a jumbo loan), a piggyback mortgage may help. You’ll finance the amount needed above the conforming limit, which keeps you out of the jumbo loan world’s higher interest rates and more stringent approval guidelines.
  3. Your current home hasn’t sold. If you need to buy a new home before your current home is sold, a piggyback loan may bridge the gap if you don’t have the cash to cover a 20% or higher down payment. An added bonus: When your home does sell, you can use your proceeds to pay off the second loan without having to refinance the first mortgage.
  4. You’re expecting a large bonus or other payouts. A piggyback loan may be worth it if you find your dream home before you’re scheduled to receive a large bonus or commission. Once you receive your windfall, you can use the money to pay off the second loan.
  5. You want to keep cash in the bank. Many financial experts recommend having at least three to six months’ worth of monthly expenses in an emergency fund. If a large down payment makes too big of a dent in your rainy day account, consider a piggyback loan and then save up to pay off the second mortgage as quickly as you can.

THINGS YOU SHOULD KNOWIf you’re taking out a loan backed by the Federal Housing Administration (FHA), a piggyback loan won’t reduce or eliminate your FHA mortgage insurance. The lump sum (upfront) and annual mortgage insurance premiums are required in most cases, regardless of your down payment amount.

How a piggyback loan works

The easiest way to understand how a piggyback loan works is to compare it with a regular mortgage. The table below shows a piggyback mortgage for a $300,000 purchase if you have 10% of your own money and need the remaining $270,000 financed.

Regular mortgage Piggyback mortgage
Loan amount:   $270,000 1st mortgage

Total monthly payment:   $1,765.68*
(Includes $140.63 PMI)

Loan amount:     $240,000 first mortgage
$30,000 second mortgage
Monthly Payment:   $1,494.50 first mortgage*
$250.25 second mortgage**
Total monthly     $1,744.75
payment
Total amount borrowed:   $270,000 Total amount borrowed:   $270,000

*Based on a 1.25% property tax rate, $1,050 annual homeowners insurance premium and $50/month HOA dues.
**Based on a 5.82% 15-year fixed home equity loan rate average from ValuePenguin.

Pros and cons of piggyback loans

Pros

  You can avoid mortgage insurance

  You may avoid jumbo loan financing

  You’re building equity faster with a 15-year fixed balance on the second mortgage

  You can pay off the second mortgage balance so you’re left with one lower mortgage payment

Cons

  You’ll have to pay closing costs for two loans and juggle two mortgage payments

  You may have challenges qualifying for the second mortgage

  You’ll likely pay a higher interest rate on the second mortgage

  You’ll net less if you suddenly have to sell your home and the value has dropped

How to get a piggyback loan

Getting two mortgages at the same time adds a few steps to the standard mortgage process. With a piggyback loan you’ll have to:

  1. Apply for two separate loans. Some mortgage companies offer both the first and second mortgages, while others may be set up with different lenders for each loan. Make sure you discuss the piggyback loan process with your loan officer so you know what to expect.
  2. Qualify for both mortgages. The minimum mortgage requirements are different for a first and second mortgage. For example, conventional lenders typically require a credit score as low as 620, but some home equity lenders require a score of 660 or 680. Check with your lender to make sure you meet the guidelines for approval on both loans. If you can’t qualify for both mortgages, then a piggyback loan doesn’t make sense.
  3. Provide documents for each loan type. If your piggyback mortgage is with a separate lender, the paperwork requirements may vary between the first and second mortgage. You may also need to provide information about each company when you set up your homeowners and title insurance, since both loans need to be covered.

Different types of piggyback loans

  • 80-10-10 loan. The 80-10-10 piggyback loan is a popular option because it allows conventional borrowers to avoid paying for PMI by making a 10% down payment, taking out a first mortgage for 80% and a second mortgage for another 10%. It can also be a good choice if you need to buy a home before your current home has sold.
  • 80-15-5 mortgage. A variation of the option above, except it only requires a 5% down payment with a larger second mortgage piggyback balance.
  • 75-15-5 loan. Condominium buyers may consider this option to avoid the higher markups for conventional loans with small down payments.
  • 80/20 loan. These were popular during the years leading up to the housing boom and allowed for 100% financing of a home purchase. When the housing market crashed, many borrowers couldn’t afford both payments and defaulted. This piggyback loan structure is not as common today but could return, according to the Consumer Financial Protection Bureau.

THINGS YOU SHOULD KNOW

Although the first mortgage can’t typically exceed 80% on a piggyback loan, you can split up the loan-to-value (LTV) ratio to fit your specific needs. Your LTV ratio is a measure of how much of your home’s price is borrowed. For example, if you need to close on a new $300,000 home but encounter a delay in getting $120,000 worth of equity you expect to net from the sale of your current home, a piggyback loan may save the day. Assuming you plan to put 10% of your own money up, you could:

  • Borrow $150,000 for the new home’s first mortgage (50% of your new home’s price)
  • Borrow $120,000 for the second mortgage (40% of the home price)
  • Make a $30,000 down payment (10% of the home price)

In this case, you’d have a 50-40-10 piggyback loan. Once your current home sells, you can pay off the 40% LTV second mortgage, leaving you with just the monthly payment on the $150,000 mortgage. You won’t have to hassle with refinance costs, and you’ll end up with $150,000 of equity in your new home by paying off the second mortgage.

 

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