When buying a home, there’s no one-size-fits-all approach to financing. Some buyers look for alternative loan structures to help manage the upfront costs, avoid fees, or qualify for a better rate. One of these strategies is the piggyback loan, an option that involves taking out two loans simultaneously. They can offer valuable advantages in the right circumstances, although they’re not as commonly discussed as traditional mortgages.
What Is a Piggyback Loan?
A piggyback loan is a mortgage structure where a homebuyer takes out two loans at the same time to finance the purchase of a home. The purpose of the second loan is usually to avoid private mortgage insurance (PMI) or to reduce the size of the primary mortgage.
The most common form of a piggyback loan is the 80-10-10 loan, which is structured like this:
- The first mortgage covers 80% of the home’s purchase price.
- The second mortgage (the “piggyback”) covers 10%.
- The buyer contributes a 10% down payment.
Other combinations of loans can also be used depending on the buyer’s financial profile and the lender’s terms. The goal remains the same regardless of how it’s broken up: reduce the primary mortgage to avoid PMI and effectively manage costs.
Why Use a Piggyback Loan?
The most common reason why homebuyers use a piggyback loan is to avoid paying private mortgage insurance (PMI). PMI is typically required when the buyer puts less than 20% down on a conventional mortgage. It can cost hundreds of dollars per month and provides no equity benefit to the borrower; its only purpose is to protect the lender.
By using a piggyback loan, the buyer can reduce the primary mortgage to 80% of the home’s value and bypass the PMI requirement. In addition to avoiding PMI, these loans can help buyers:
- Qualify for lower interest rates by keeping the first mortgage within conforming loan limits.
- Reduce their initial cash outlay while still reaching the 20% down benchmark.
- Maintain more control over how their loans are structured, especially when working with a portfolio lender.
Who Should Consider a Piggyback Loan?
Piggyback loans won’t be the right solution for everyone, but they can be incredibly useful in specific situations. Here are a few scenarios where a piggyback loan might make sense:
1. Buyers Who Want to Avoid PMI
If you have strong credit and a steady income but can’t afford the full 20% down payment, a piggyback loan offers a helping hand. You can still avoid PMI while making a lower down payment and splitting the difference through a second mortgage.
2. Homebuyers in High-Cost Areas
In markets where home prices exceed conventional loan limits, piggyback loans allow you to keep the first mortgage within conforming boundaries and potentially qualify you for a lower interest rate.
3. Self-Employed or Commission-Based Earners
If you have a variable income, having two loans can offer a bit more flexibility in how your payments are structured. Some buyers prefer the second mortgage to be a home equity line of credit (HELOC), which can provide added flexibility in repayment.
4. Buyers With Significant Equity in an Existing Home
If you’re using proceeds from a recent home sale and want to preserve cash, a piggyback loan may help you keep more liquidity while still being able to avoid PMI.
Types of Piggyback Loans
The second loan in a piggyback structure is usually one of two types:
- Home Equity Loan: A fixed second mortgage with set payments and interest rates. This type of loan offers stability for borrowers who want predictable costs.
- Home Equity Line of Credit (HELOC): A variable-rate line of credit that can be taken from as needed. If the buyer expects to pay off the second mortgage fast or in large chunks, this can offer more flexibility.
Your choice will depend on your long-term goals, risk tolerance, and whether you want a fixed or variable rate structure.
Pros
- Avoid PMI: This is the primary benefit for most borrowers.
- Lower Monthly Payments- especially compared to paying PMI.
- Tax Deductibility: In some cases, interest on the second mortgage may be tax-deductible. (Always consult a tax advisor.)
- More Loan Flexibility- mainly when working with lenders who offer customized solutions.
Cons
- Two Monthly Payments: Managing two loans means keeping track of two payment schedules and possibly different loan terms.
- Higher Interest on Second Loan: The piggyback portion may carry a higher interest rate, especially if it’s a HELOC.
- Stricter Approval Requirements, since some lenders may have tighter qualifications for second mortgages.
- Not Widely Available: Fewer lenders offer piggyback loans, which could limit your options.
Is a Piggyback Loan Right for You?
Deciding whether to use a piggyback loan comes down to your specific financial situation and long-term goals. A piggyback loan could be your answer if your top priority is avoiding PMI and you’re stable enough financially to manage two payments. If you want to keep the process simple and predictable, a single loan might be a better fit- even if you still end up having PMI.
Before committing, be sure to take your time to run the numbers on both loan types. Compare the total costs of:
- A single loan with PMI
- A piggyback loan structure
Make sure you factor in interest rates, fees, and any potential risks of having a variable-rate second mortgage.
Final Thoughts
Piggyback loans are a strategic tool that can help borrowers minimize costs, avoid PMI, and structure their mortgage in a way that works for their unique situation. While not right for everyone, they’re worth exploring if you’re looking to optimize your home financing.
Our home loan officers at Strategic Mortgage Solutions are pros at matching our clients with outstanding mortgages that work best for you. We’ll happily explain your options so you can select the right home loan for your family. Contact us today to set up a friendly, no-commitment appointment.
