PIGGYBACK LOAN DEFINITION:
A piggyback loan, also called an 80-10-10 loan, lets you buy a home with two mortgages that total 90% of the purchase price and a 10% down payment. It gets its name because the smaller loan “piggybacks” on the larger loan.
It’s also called a combination loan by some lenders. “Piggyback loan” fell out of common usage in the years after the housing crash, but the phrase has made a comeback in recent years.
People get 80-10-10 mortgages mainly to avoid paying private mortgage insurance, to sidestep the strict lending requirements of jumbo loans or to buy a new home before selling their current dwelling. We’ll use the terms 80-10-10 loan and piggyback loan interchangeably.
How does an 80-10-10 mortgage work?
80-10-10 loans are structured as two mortgages with a down payment. The first number always represents the primary mortgage, the middle number represents the secondary loan and the third number represents the down payment.
An 80-10-10 piggyback loan is two mortgages, plus a down payment:
- First mortgage: 80% of the home’s price
- Second mortgage: 10% of the home’s price
- Down payment: 10% of the home’s price
The 80-10-10 combination is the most common type of piggyback loan, but other blends of numbers are possible. For example, people sometimes get 75-15-10 loans to buy condominiums because they can get lower mortgage rates by borrowing a maximum of 75% of the condo’s value.
How to get a piggyback loan
Getting an 80-10-10 mortgage requires applying for two separate loans – the primary mortgage and the second mortgage. In some cases, you’ll need to get the loans from separate lenders. Tell the loan officer for the primary mortgage you want an 80-10-10 piggyback loan and request referrals for lenders that can do the second mortgage.
Applying for two loans may mean gathering two sets of financial documents, filing two applications and going through two closings.
If you think an 80-10-10 piggyback loan is right for you, your next step is to apply for a conventional loan at 80% of the home’s value, plus an equity loan or line of credit for 10% of the value.
Why get an 80-10-10 loan?
There are two major reasons to get an 80-10-10 piggyback loan: to save money by steering clear of mortgage insurance and to qualify for an easier-to-get conforming mortgage instead of a jumbo loan. A conforming loan is a mortgage that meets regulatory standards, including a maximum loan amount. A mortgage for more than the maximum amount is a jumbo loan.
To avoid mortgage insurance
Lenders require private mortgage insurance when the conforming loan is for more than 80% of the home’s value. An 80-10-10 loan takes advantage of a loophole in the mortgage lending rules because the primary mortgage is for 80% of the home’s price. The combination of the borrower’s 10% down payment and the second mortgage for the other 10% allows the borrower to avoid mortgage insurance.
A piggyback loan can be used to avoid private mortgage insurance, or PMI.
The second mortgage in an 80-10-10 loan is usually a home equity line of credit, or HELOC. For people with credit scores of 740 or higher, 80-10-10 loans often cost less than traditional loans with mortgage insurance during the first 10 years, while the HELOC is interest-only. The 80-10-10 advantage narrows for people with lower credit scores because of the higher interest rates they’re charged.
To get a primary mortgage smaller than a jumbo
Some buyers of more expensive homes choose piggyback mortgages to get around the stricter lending requirements for jumbo mortgages. Jumbo loans require bigger down payments, higher credit scores and more cash reserves than conforming mortgages do.
Here are two strategies to get around the tighter requirements for jumbo loans:
- Reduce the loan amount below the conforming limit. A borrower can use a piggyback mortgage to get a conforming loan, which has looser lending standards, instead of a jumbo mortgage.
- Get more favorable terms with 20% down. Lenders often charge higher interest rates for jumbos when the borrower puts less than 20% down.
Pros of piggyback loans
|Steer clear of mortgage insurance|
Allow conforming borrowers to steer clear of mortgage insurance.
|Avoid jumbo loans|
Borrowers can avoid jumbo loans, which have stricter requirements.
Jumbo borrowers get a better mortgage rate by using the second mortgage as a supplement to the down payment.
Cons of piggyback loans
The borrower must qualify for, apply for, and close on two loans instead of one.
Refinancing the primary mortgage later might be tricky because it requires the consent of the second-mortgage lender.
|Building equity slower|
Homeowners build equity more slowly when making the minimum, interest-only payments on the HELOC during the initial draw period (usually 10 years).
|Variable interest rates|
Interest rates on HELOCs are variable, so they can go up.