A piggyback loan is a financial tool used by homebuyers to avoid paying Private Mortgage Insurance (PMI) without having to make a full 20% down payment. It involves taking out two loans simultaneously: a primary mortgage covering 80% of the home’s purchase price and a secondary loan — the piggyback loan — covering an additional portion, typically 10%, with the borrower providing the remaining 10% as a down payment. This method is most commonly referred to as the “80/10/10” mortgage strategy.
How the 80/10/10 Mortgage Strategy Works
For example, if you’re buying a home priced at $300,000:
- 10% Down Payment: You pay $30,000 upfront from your savings.
- 80% Primary Mortgage: Your main mortgage loan covers $240,000, which is 80% of the home’s value. Keeping this loan at or below 80% typically exempts you from paying PMI, an insurance to protect lenders when down payments are less than 20%.
- 10% Piggyback Loan: A second mortgage for $30,000 covers the remaining portion.
This layered approach reduces your primary mortgage loan-to-value (LTV) ratio to 80%, effectively sidestepping PMI costs that usually add 0.5% to 1% annually to your mortgage payments. Using this strategy can make homeownership more attainable by lowering upfront cash requirements.
Advantages of Piggyback Loans
- Avoid PMI: The primary benefit is eliminating PMI, which can add significant monthly costs—often hundreds of dollars depending on your loan amount and credit.
- Lower Down Payment: Instead of saving 20% cash, buyers can make a more achievable 10% down payment.
- Faster Home Purchase: If you have some savings but not the full 20%, piggyback loans can accelerate homebuying timelines.
Considerations and Drawbacks
While piggyback loans have perks, they also come with downsides:
- Higher Interest Rates: The second mortgage often carries a higher interest rate than the primary loan, increasing total interest costs over time.
- Two Monthly Payments: Borrowers must manage payments on both loans, which can be more complex.
- Refinancing Complexity: Refinancing either mortgage might be more complicated due to the involvement of two separate loans.
Variations of Piggyback Loan Structures
Beyond the popular 80/10/10, other structures include:
- 80/15/5: 80% primary mortgage, 15% piggyback loan, 5% down payment.
- 75/15/10: 75% primary mortgage, 15% piggyback loan, 10% down payment.
Each structure balances loan amounts and down payments differently to fit the buyer’s financial situation.
Who Should Consider Piggyback Loans?
- Buyers without 20% down: Especially first-time homebuyers aiming to avoid PMI.
- Borrowers prioritizing cash flow: Those who want to avoid PMI payments to manage monthly budgets.
When to Skip Piggyback Loans
- If you can afford a 20% down payment, a single mortgage without PMI is often simpler and cheaper.
- If managing multiple loans is undesirable.
Example
The Millers bought a $400,000 condo with a $40,000 down payment:
- With a standard mortgage, their $360,000 loan would require PMI, adding about $225 monthly.
- Using an 80/10/10 piggyback, their primary mortgage was $320,000, piggyback loan $40,000, and they avoided PMI. However, combined payments were higher.
Tips for Using Piggyback Loans
- Compare interest rates carefully for both loans.
- Calculate overall costs versus PMI payments.
- Consider your stay duration: Higher second mortgage rates may be less impactful if you sell sooner.
- Understand refinancing implications.
Learn More
Explore related topics like the 80/10/10 Loan to deepen your understanding of mortgage strategies.
External Resources
For more detailed information about mortgage insurance and loan options, visit the Consumer Financial Protection Bureau (CFPB) guide on PMI.