- With a piggyback loan, you take out a larger mortgage and a smaller second.
- The funds from the second mortgage are used as your down payment, which may lead to better terms on the first mortgage.
- There are additional costs associated with a piggyback loan, so be sure to determine if it would actually save you money.
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When you want to buy a home, making a down payment can be a big hurdle, especially if you want to put 20% down to avoid paying for private mortgage insurance. If you’re struggling to afford a large down payment, a piggyback loan might be a good option for you.
What is a piggyback loan?
A piggyback loan involves taking out two mortgages, one large and one small. The smaller mortgage “grafts” onto the larger one. The primary loan is a conventional mortgage loan. The other is a home equity loan or home equity line of credit.
The main reason for taking out a piggyback loan is to avoid paying for private mortgage insurance.
“Sometimes they work really well,” says Darrin Q. English, senior manager of community development loans at Quontic Bank. “Even if you have rates that are in the nines or tens on that second mortgage, it still represents a lower monthly payment and a better use of your income, compared to paying insurance premiums that do nothing for. you.”
Types of piggyback loans
There are many types of piggyback loans, and their main differences boil down to the math.
An 80-10-10 loan is probably the most common type of piggyback loan. The first mortgage is 80% of the purchase price, the second is 10% and you provide 10% cash for the down payment. By combining the second mortgage with the money you’ve already saved for the down payment, you’ll have a total of 20% to set aside.
This is similar to an 80-10-10 loan, but you may prefer it if you have around 5% for a down payment rather than 10%.
An 80/20 loan is a great option if you have little or no money set aside for a down payment. Your first mortgage is 80% of the price of the house and the second mortgage is the 20% you will use for the down payment.
A 75-15-10 loan is most often used for condominiums because condominium interest rates are higher when you need to borrow more than 75% of the purchase price.
Advantages and disadvantages of a piggyback loan
- You avoid private mortgage insurance. With conventional mortgages, you have to pay the PMI if you have less than 20% down payment. By using a second mortgage to achieve a 20% down payment, you don’t have to pay up to hundreds of dollars each month for PMI.
- You can avoid a jumbo mortgage. You must apply for a jumbo mortgage if you want to borrow more than the FHFA allows. Jumbo mortgages have more stringent requirements that you may or may not meet, and they charge higher interest rates. Taking out a second mortgage will reduce your first mortgage, so you don’t have to apply for a jumbo mortgage.
- This is handy if you are selling your house. Are you selling one house and buying another? It can be difficult to afford a 20% down payment on the new home if your original home hasn’t sold yet. A piggyback loan can provide these funds until the house sells.
- Interest rates are often adjustable on a HELOC or home equity loan. “It’s unpredictable where rates will go, how the Federal Reserve will raise rates, and what that will do for an adjustable rate mortgage in the months to come,” English said. “This uncertainty is one reason people should be careful about piggybacking.”
- You will pay twice the closing costs. With a traditional mortgage, you would pay the closing costs once. But with two mortgages, you pay everything twice.
- You will have two mortgage payments. Until you pay off the second mortgage (which usually has a shorter term than the first), you’ll make two payments each month. Find out if you can fit this into your monthly budget.
Alternatives to the piggyback loan
Pay for private mortgage insurance
You might prefer to pay for the PMI, especially if it turns out that the PMI would be cheaper each month than a second mortgage payment. Lenders are required to cancel the PMI once you have 22% equity in your home, but you can apply for early cancellation when you reach 20%.
Apply for a jumbo mortgage
If your credit score and debt-to-income ratio are strong enough to qualify for a jumbo mortgage, you may prefer to make just one payment per month.
Buy a cheaper house
Buying a cheaper home could help you qualify for a compliant mortgage rather than a jumbo mortgage. This would eliminate your need to bypass a jumbo mortgage with a piggyback loan.
A more affordable home might also help you pay a 20% down payment, so paying for the PMI wouldn’t be a problem.
Take out a bridging loan
Are you considering a piggyback loan because you are moving and haven’t sold your house yet? A bridging loan might be better suited.
This is a short term home loan that helps you bridge the gap between when you buy your new home and when the finances of the sale of your original home come into play. typically borrow up to 80% of the value of your original home, and the term is six months to a year. You may prefer a bridging loan if you want a second, shorter term loan so that you don’t have two mortgage payments at two for a long time.
Your choice between a piggyback loan and other options will likely depend on your finances and the cost of homes in your area.