Mortgages Part 4G: Piggyback Loans

Piggyback loans are a way for buyers to buy a home with less than 20% down payment, and to avoid paying for private mortgage insurance. This is done by taking out a mortgage loan to purchase a house and another loan—a piggybacked loan—to cover the down payment. For example, if you only have enough money to pay 10% down payment, you will need to get a 90% mortgage, and pay PMI every month. A piggyback loan will work this way:

Down payment amount: 10% Primary mortgage amount: 80% Piggyback mortgage amount: 10%

The above loan would be called 80/10/10. 80 stands for the primary loan, and 10 stands for the secondary loan percentage. The final 10 is the percent the borrower has to pay. These loans were very popular before the housing market collapse. They all but disappeared for a few years after the market collapsed, but are becoming available again.

General characteristics of a piggyback loan

  • Piggyback loans are usually written as adjustable rate loans rather than 30-year fixed-rate home loan.
  • The lender on the second mortgage is at a lower lien position than the primary mortgage. If a house goes into foreclosure, money will go to the primary lender before it goes to the second mortgage lender. In other words, it is more risky for the piggyback lender, and therefore, the interest rate will be higher.
  • Guidelines for a piggyback loans are stricter now. Lenders now often require a borrower to have a credit score of 700 and a strict debt-to-income ratio
  • There are no more 80/20 (which essentially 100% loans) nowadays. Usually they are structured as 80/10/10 or at most 80/15/5.

Is a piggyback loan a good idea?

A piggyback mortgage is only appropriate to take on if the buyer has done the math to see if it will save money over paying for PMI. A piggyback mortgage may also make taking out a home equity line of credit harder in the future (because the home equity will be third in line for payback in case of a foreclosure - an even riskier position).

An advantage is that the interest on a second mortgage or home equity loan is tax-deductible up to $100,000, although if you fall within income limits set by the IRS, PMI payments can also be tax deductible. The piggyback loan are sometimes of a small amount, which means by paying extra a month, you can pay it off quickly. 

Mortgage Guide Home | Previous Article: Jumbo Mortgages | Next Article: Types of Mortgage Lenders

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