What Is A Piggyback Loan?

When a borrower takes out two mortgages simultaneously to purchase a home, the second mortgage is referred to as a piggyback loan. A piggyback loan is typically a home equity line of credit (HELOC) that accounts for 10% of the home’s purchase price. This loan “piggybacks” off of a conventional mortgage that covers 80% of the home price, leaving only 10% for the down payment.

Piggyback mortgages reduce out-of-pocket down payments for borrowers who cannot put down the traditional 20%. Borrowers take out piggyback loans as an alternative to jumbo loans, which come with strict requirements and high fees, and to avoid paying private mortgage insurance (PMI).

Down Payments vs. PMI

Most conventional mortgages require a down payment, which involves paying a certain portion of the home’s purchase price, usually between 3% and 20%, upfront.

If you do not put down at least 20% of the home price, your mortgage may require you to purchase PMI to shield the lender from default. In this case, you must pay PMI—which can tack on another 0.1% to 2% of the loan amount each year—until your loan value falls below 80% of the home’s value.

If you, like most homebuyers, cannot cough up a 20% down payment, PMI may seem inevitable. But piggyback mortgages offer a loophole. By simulating a 20% down payment, a piggyback loan can allow you to bypass PMI on your conventional mortgage.

How Do Piggyback Loans Work?

As a second mortgage, a piggyback loan supplements your primary mortgage to reduce your down payment, curb interest on your conventional mortgage, and circumvent PMI.

Eligibility For Piggyback Loans

Since a piggyback mortgage entails qualifying for two mortgages, the requirements are more strict than they are for a single mortgage. To qualify for a HELOC, you’ll need a high credit score of at least 680-700—ideally, your score should be 740 or higher. For a conventional mortgage, a score of 620 usually suffices.

Your debt-to-income (DTI) ratio also comes into play here. To take out a HELOC on top of a conventional mortgage, your DTI should be no higher than 43%, depending on the lender. (For a conventional mortgage, the max DTI ratio is usually 50%.) Keep in mind that the “debt” in this case includes your monthly payment amounts for both mortgages, plus your credit card minimum payments, student loan payments, and car payments.

What Are The Components of a Piggyback Loan?

Piggyback loans are also called “80/10/10 loans” due to how they’re often structured.

When you take out two mortgages in a piggyback loan scenario, the first is a traditional 30-year, fixed-rate conventional mortgage that covers 80% of the home’s purchase price. The second mortgage/HELOC, or the piggyback, covers another 10%, and your down payment then accounts for the remaining 10% of the home price.

A piggyback mortgage is always subordinate to the primary mortgage. In other words, if you sell your home down the track, your first mortgage would be paid off before your second.

Keep in mind as well that most HELOCs have variable interest rates, meaning the interest rate and minimum monthly payment on your piggyback loan could change from month to month. So if interest rates rise in the future, your HELOC payments could, too.

What Is The Purpose Of The Second Mortgage?

A piggyback loan is a second mortgage that augments your 10% down payment to simulate a 20% down payment. This allows you to bypass PMI and can lower the interest rate on your primary mortgage.

Traditionally, a buyer would only take out a second mortgage after their primary mortgage has gone into effect. With a piggyback loan, however, you take out your first and second mortgages at the same time.

As previously mentioned, piggyback loans are usually HELOCs, or home equity lines of credit. HELOCs convert your home’s value into spendable cash that must be repaid, similar to a credit card. When you use a HELOC for a piggyback mortgage, you’ll have maxed out that line of credit, so you’ll have to pay it down before you can borrow against the HELOC again.

While most conventional mortgages have 30-year loan terms, HELOCs usually have a 10-year draw period. This means after 10 years, you can no longer borrow against your HELOC and must use your monthly payments to pay off any remaining balance.

How Do Piggyback Loan Interest Rates Compare With Conventional Loans?

Because HELOCs have shorter loan terms, piggyback mortgages tend to have higher monthly payments and higher interest rates than conventional mortgages. Moreover, variable interest rates can make your piggyback loan payments somewhat unpredictable, whereas your payments on a fixed-rate mortgage will stay the same each month, no matter what.

On the bright side, HELOC interest rates are typically much lower than interest rates on credit cards, personal loans, and other types of variable-rate loans.

Some piggyback loans allow for interest-only payments, meaning the borrower is only liable to pay the interest for a specified portion of the loan term (often the first 10 years). However, interest-only HELOCs cost more overall and are should not be used for long-term financing.

Types Of Piggyback Loans

Though piggyback loans usually take on an 80/10/10 structure, other options exist as well. Below we explore a few common ways to use a piggyback loan.

80/10/10 Loans

The most popular structure for a piggyback mortgage, an 80/10/10 loan comprises the following elements:

Primary loan (conventional mortgage): 80% of the home’s purchase price
Secondary loan (HELOC): 10% of the home’s purchase price
Down payment (cash): 10% of the home’s purchase price

It’s tougher to qualify for an 80/10/10 loan than for a conventional mortgage alone since piggyback loans require you to have a high credit score and a relatively low debt-to-income ratio.

75/15/10 Loans

The 75/15/10 breakdown is the second-most common way to structure a piggyback loan, often used to finance condos since mortgage rates for condos tend to rise once the mortgage’s loan-to-value (LTV) ratio exceeds 75%. A 75/15/10 piggyback mortgage looks like this:

Primary loan (conventional mortgage): 75% of the home’s purchase price
Secondary loan (HELOC): 15% of the home’s purchase price
Down payment (cash): 10% of the home’s purchase price

Taking out a larger HELOC could increase your DTI ratio since HELOCs have higher interest rates and payments than conventional mortgages. So it might be tougher to qualify for a 75/15/10 loan than an 80/10/10 loan.

80/15/5 Loans

Buyers with only enough cash to put down 5% on their home of choice might spring for the 80/15/5 structure. You might have already guessed how this loan breaks down:

Primary loan (conventional mortgage): 80% of the home’s purchase price
Secondary loan (HELOC): 15% of the home’s purchase price
Down payment (cash): 5% of the home’s purchase price

An 80/15/5 piggyback loan allows you to finance a home in a high-LTV scenario without having to pay PMI. This structure is relatively uncommon and works best for high-income buyers, however, since it could result in a high DTI ratio.

80/20/0 Loans

An 80/20/0 loan structure involves no down payment. In this scenario, the primary mortgage covers 80% of the home’s purchase price, and the piggyback mortgage covers the rest.

An 80/20 split for a piggyback loan was relatively common before the subprime mortgage crisis of 2007, but in the current climate, you may not find a lender willing to agree to these terms.

How Much Do Piggyback Loans Cost?

A piggyback loan can help you get a better rate on your primary mortgage since lenders typically offer lower rates on mortgages that finance 80% of the home’s value or less. Because your primary mortgage rate is permanent, even a small change can make a big difference over the 30-year loan term.

However, closing any mortgage comes with closing costs, and taking out two mortgages means you have to pay closing costs on both of them. A HELOC’s closing costs can add up to 5% to your total loan cost.

HELOCs are shorter-term loans with higher interest rates, so you could end up paying more in interest on your second mortgage than you would have for PMI had you taken out a larger conventional mortgage instead. This borrowing scenario only saves you money in the long run if PMI would have been more expensive than the interest and other costs associated with taking out a piggyback loan.

How To Get Piggyback Loans

Applying for a piggyback loan involves applying for two mortgages at the same time when you purchase a home. Before tackling this process, ensure the second mortgage is a good idea by planning your cash down payment and evaluating the proposed terms of your first mortgage.

If you have not yet committed to a primary mortgage lender, you can speak with prospective lenders about their approach to piggyback loans.

Talk To Your Loan Officer

The simplest way to get a piggyback loan is through your primary mortgage lender. Talk to your loan officer to see if the lender will underwrite the second mortgage as well. More commonly, your loan officer may refer you to other financial institutions for the second mortgage and help you with the application process from there.

Search For Your Own Second Mortgage

Alternatively, you can compare prospective lenders on your own to try and find the best deal available on a second mortgage. If you do this without assistance from your primary mortgage lender, make sure to keep your primary lender in the loop on your plans.

Should You Get A Piggyback Loan?

A piggyback mortgage might sound enticing if you’re strapped for cash for a down payment or you’re facing high fees associated with a jumbo loan or PMI. However, piggyback loans are not right for everyone.

Consider Piggyback Loans If…

You might be a good candidate for a piggyback loan if you meet all or most of the following standards:

You cannot make a 20% cash down payment.
You have a credit score of 740 or higher.
Private mortgage insurance would cost more than the costs associated with a piggyback loan.
You are buying a condo and would be subject to higher rates with a conventional mortgage covering 80% of the purchase price.
You plan to borrow a large amount and would otherwise have to take out a jumbo loan.
It is unlikely you will refinance your home in the future.
You do not qualify for first-time homebuyer programs or other government-backed homebuyer assistance programs.

Advantages

You are responsible for a smaller cash down payment.
You can forgo PMI, which can cost you up to 2% of the primary mortgage amount each year until the loan-to-value ratio is less than 80%.
You can avoid taking out a jumbo mortgage, which typically involves larger fees and more stringent eligibility standards.
Your primary mortgage might come at a lower rate since the piggyback loan simulates a 20% down payment.
You can avoid the higher mortgage rates associated with condos and townhomes, in which case a 75/15/10 piggyback loan may get you a better deal.

Disadvantages

A second mortgage comes with a higher interest rate since it is subordinate to your primary mortgage.
You may have a harder time qualifying for a piggyback mortgage since this borrowing scenario requires a high credit score and a lower DTI ratio.
You might struggle to refinance your home in the future since you would need the second mortgage lender to approve plans to refinance your primary mortgage.
Closing on two mortgages means closing costs on two mortgages.
While PMI only applies until your LTV ratio drops below 80%, your second mortgage will not go away until you pay it off.

Alternatives To Piggyback Loans

In some cases, you may be better off paying PMI or taking out a jumbo loan than you would be with a piggyback loan. Read on to learn about these options.

PMI

If your conventional mortgage exceeds 80% of the home’s purchase price, your mortgage lender may require you to pay private mortgage insurance. PMI protects the lender from default in case you fall behind on mortgage payments.

Most borrowers pay a monthly premium for PMI, typically amounting to between 0.1% and 2% of the mortgage amount per year.

On the bright side, you are not responsible for paying PMI forever. Once your equity in the home surpasses 20%, you can usually cancel PMI.

It might be a better idea to pay PMI instead of faking out a piggyback mortgage if the expenses associated with the piggyback loan—interest and closing costs included—exceed the cost of PMI in the long run.

Jumbo Mortgages

The Federal Housing Finance Agency sets a maximum amount for a conventional conforming mortgage. As of 2023, this limit is $726,200 in most of the U.S., though some counties cap conforming mortgages at over $1 million. Mortgages exceeding their local conforming loan limits are called jumbo loans.

Jumbo loans are riskier for lenders and, therefore, generally harder to qualify for and costlier to pay off. You might be required to make a 20% down payment to get a jumbo loan, and jumbo mortgages tend to come with higher closing costs. You may have to pay a higher interest rate on a jumbo loan, too, though this is not always the case.

A jumbo loan can still be less expensive and more sensible than a piggyback loan, however, depending on the terms of the piggyback HELOC.

Alternative Lenders

Various government agencies offer homebuying assistance programs to first-time buyers, low-income buyers, military service members and their families, and homebuyers in rural areas. The following agencies might offer better deals than a piggyback loan if you qualify:

Federal Housing Administration: These bank-issued loans, insured by the federal government, cater to low- and moderate-income families. FHA loans require lower down payments and credit scores but feature higher interest rates and require PMI.

U.S. Department of Veterans Affairs: VA loans are issued by private lenders but guaranteed by the federal government. These loans typically do not require down payments, have lower interest rates and closing costs, and do not require PMI. Veterans, service members, and their families may qualify for VA loans.

U.S. Department of Agriculture: USDA loans may apply to home purchases in eligible rural areas. The USDA offers a variety of loan options to assist rural homebuyers.

Your state government may also offer its own homebuyer assistance programs.

Piggyback Loans and You

If you are unable to fork over a 20% down payment but have a high credit score and plan to pay off your second mortgage quickly, a piggyback loan can be a great way to score lower interest on your primary mortgage, avoid paying PMI premiums, and save money on your home in the long run.

However, the higher interest rate on a piggyback loan can end up costing you more in the long run if you take longer than anticipated to pay off the second mortgage. In that case, a conventional conforming mortgage or jumbo loan may offer you a better deal. Likewise, if you qualify for a homebuyer assistance program like an FHA loan or a USDA loan, that might be your best bet for saving money on a home.

Understanding Piggyback Loans: A Comprehensive Guide