What you need to know about a piggyback loan before signing

A piggyback loan is taken out to finance part of the down payment on a home so a buyer can put 20 percent down. That’s the magic number needed to avoid private mortgage insurance (PMI).

A piggyback loan is a type of second mortgage, so the monthly payments may be tax-deductible. Monthly PMI payments are not. Having a 20 percent down payment may also qualify you for a lower interest rate on the primary mortgage, potentially saving you money in the long run.

The piggyback loan closes at the same time as the mortgage. The most common type of piggyback loan is called an 80/10/10: Your mortgage finances 80 percent of the home purchase, you put 10 percent down in cash and the remaining 10 percent comes from the piggyback loan.

It is important to recognize that you are trading one kind of monthly fee for another -- a PMI payment for a piggyback loan payment. However, the monthly payments on both loans are usually less than the payment for a mortgage plus PMI.

On the flip side, PMI can be usually be canceled once you have 20 to 22 percent equity in your home -- in other words, once you have paid down one-fifth of the loan’s principal. Depending on how your piggyback loan is structured, you could still be making payments beyond the point at which you could have canceled PMI.

A qualified financial adviser can help you figure out whether a piggyback loan is a good choice for you.


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