Have you heard the term “piggyback mortgage” and wondered what it is? At its most basic, a piggyback mortgage can be considered a second mortgage. These are usually either a home equity loan or home equity line of credit (HELOC).
Piggyback mortgage loans can sometimes also be a wise option for homebuyers looking to finance a home without putting down a significant down payment. In this situation, they are taken out at the same time as the main mortgage. A benefit is that they may help you pay less over the life of the loan because you don’t need to pay for private mortgage insurance (PMI).
Read on to learn more about what a piggyback loan is and how it works.
Table of Contents
- What Is a Piggyback Mortgage Loan?
- How Do Piggyback Loans Work?
- Types of Piggyback Loans
- Average Piggyback Mortgage Rate
- Benefits and Disadvantages of a Piggyback Mortgage
- How to Qualify for a Piggyback Mortgage
- Refinancing a Piggyback Mortgage Loan
- Is a Piggyback Mortgage a Good Option?
- Piggyback Mortgage Alternatives
What Is a Piggyback Mortgage Loan?
Homebuyers can use a piggyback mortgage loan to fund the purchase of a property. Essentially, they take out a primary loan and then a second loan, “the piggyback loan,” to fund the rest of the purchase.
Using the strategy helps homebuyers reduce their mortgage costs, such as by not needing a 20% down payment to qualify. It also helps them avoid the need for private mortgage insurance, which is usually required for those who don’t have a 20% down payment.
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
Recommended: How to Qualify for a Mortgage
How Do Piggyback Loans Work?
When appropriate for a homebuyer’s unique situation, a piggyback mortgage might potentially save the borrower in monthly costs and reduce the total amount of a down payment.
Here’s an example to consider of how they work:
Jerry is buying a home for $400,000. He doesn’t want to put down more than $40,000 for the down payment. This eliminates several mortgage types. He works with his lender through the prequalification and preapproval process to secure a first mortgage for $320,000, then with a piggyback mortgage lender to secure a piggyback mortgage of $40,000, and finishes the financing process with his down payment of $40,000.
Piggyback home loans were a popular option for homebuyers and lenders during the housing boom of the early 2000s. But when the housing market crashed in the late 2000s, piggyback loans became less popular, as a lack of equity proved homeowners more vulnerable to loan defaults.
Fast forward to today’s housing market. With the cost of living by state rising in certain areas, piggybacks are starting to become a viable and acceptable option again.
Recommended: First-Time Homebuyer Guide
Types of Piggyback Loans
Here are some of the types of piggyback loans to consider:
A 80/10/10 Piggyback Loan
There are different piggyback mortgage arrangements, but an 80/10/10 loan tends to be the most common. In this scenario, a first mortgage represents 80% of the home’s value, while a home equity loan or HELOC makes up another 10%. The down payment covers the remaining 10%.
In addition to avoiding PMI, homebuyers may use this piggyback home loan to avoid the mortgage limits standard in their area.
đź’ˇ Quick Tip: With SoFi, it takes just minutes to view your rate for a home loan online.
A 75/15/10 Piggyback Loan
A loan with a 75/15/10 split is another popular piggyback loan option. In this case, a first mortgage represents 75% of the home’s value, while a home equity loan accounts for another 15%. And like the 80/10/10 split, the remaining 10% is the down payment.
For example, a $300,000 75/15/10 loan would break down like this:
Main loan (75%): $225,000
Second loan (15%): $45,000
Down payment (10%): $30,000
See how these options stack up in chart form:
| 80/10/10 Piggyback Loan | 75/15/10 Piggyback Loan | |
|---|---|---|
| Structure: | 80% primary loan 10% HELOC 10% down payment |
75% primary loan 15% HELOC 10% down payment |
| Typical use: | Commonly used to avoid PMI and stay under jumbo loan limits | Commonly used when purchasing a condo to avoid higher mortgage rates |
Average Piggyback Mortgage Rate
A piggyback loan usually has a higher interest rate than the primary mortgage, and the rate can be variable, which means it can increase over time. Let’s say your primary mortgage rate is 6.75%. The rate on the second mortgage might be 7.5%. If you borrowed $35,000 with this piggyback mortgage, your monthly payment for that loan would be $416. Of course, the exact rates you are able to secure from a piggyback mortgage lender would be based on how much you borrow, your credit score, current interest rates, and other variables.
Benefits and Disadvantages of a Piggyback Mortgage
A piggyback mortgage may help homebuyers avoid monthly PMI payments and reduce their down payment. But that’s not to say an 80/10/10 loan doesn’t come with its own potentially negative costs.
There are pros and cons of piggyback mortgages to be aware of before deciding on a mortgage type.
Piggyback Mortgage Benefits
Allows you to keep some cash on hand. Some lenders request a downpayment of 20% of the home’s purchase price. With the average American home price of $346,270 as of mid-2023, this can be a difficult sum of money to save, and paying the full 20% might wipe out a buyer’s cash reserves. A piggyback mortgage may help homebuyers secure their real estate dreams but still keep cash in reserve.
Possibly no PMI required. In what may be the largest motivator in securing a piggyback mortgage, homebuyers may not be required to pay PMI, or private mortgage insurance, when taking out two loans. PMI is required until 20% of a home’s value is paid, either with a down payment or by paying down the loan’s principal over the life of the loan.
PMI payments can add a substantial amount to a monthly payment and, just like interest, it’s money that won’t be recouped by the homeowner when it’s time to sell. With an 80/10/10 loan, both loans meet the requirements to forgo PMI.
Potential tax deductions. Purchasing a home provides homeowners with potential tax deductions. Not only is there potential for the interest on the main mortgage loan to be tax deductible, the interest on a qualified second mortgage may also be deductible.
Potential Downsides of Piggyback Mortgages
Not everyone qualifies. Piggyback mortgage lenders take on extra risk. Without PMI, there is an increased risk of a financial loss. This is why they’re typically only granted to applicants with superb credit. Even if it’s the best option, there’s no guarantee that a lender will agree to a piggyback loan scenario. You’ll see whether the cards are stacked in your favor by going through the process of getting preapproved for your home loan.
Additional closing costs and fees. One major downfall of a piggyback loan is that there are always two loans involved. This means a homebuyer will have to pay closing costs and fees on two loans at closing. While the down payment may be smaller, the additional expenses might outweigh the initial savings.
Savings could end up being minimal or lost. Before deciding on a piggyback loan arrangement, a homebuyer may want to estimate the potential savings. While this type of loan has the potential to save money in the beginning, homeowners could end up paying more as the years and payments go on, especially because second mortgages tend to have higher interest rates.
To quickly make an assessment, make sure the monthly payment of the second mortgage is less than the applicable PMI would have been on a different type of loan.
Here are the pros and cons of piggyback loans in chart form to help you decide if this kind of mortgage arrangement is right for you.
| Pros of Piggyback Loans | Cons of Piggyback Loans |
|---|---|
| Secure a home purchase with less cash | Only applicants with excellent credit may qualify |
| Possible elimination of PMI requirements | Extra closing costs and fees may apply |
| Could qualify for additional tax deductions | A second mortgage could cost more money over the entire loan term |
How to Qualify for a Piggyback Mortgage
It’s essential to keep in mind that you’re applying for two mortgages simultaneously when you apply for a piggyback home loan. While every lender may have a different set of requirements to qualify, you usually need to meet the following criteria for approval:
• Your debt-to-income (DTI) ratio should not exceed 36%. Lenders look at your DTI ratio — the total of your monthly debt payments divided by your gross monthly income — to ensure you can make your mortgage payments. Therefore, both loan payments and all of your other debt payments shouldn’t equal more than 36% of your income, although some lenders may go higher.
• Your credit score should be close to excellent. Because you are taking out two separate loans, your risk of default increases. To account for this increase, lenders require a strong credit score, usually over 700 (though some lenders may accept 680), to qualify. A higher credit score means you’re more creditworthy and less likely to default on your payments.
Before you apply for a piggyback loan, make sure you understand all of the requirements to qualify.
Refinancing a Piggyback Mortgage Loan
Sometimes homeowners will seek to refinance their mortgage when they have built up enough equity in their home. Mortgage refinancing can help homeowners save money on their loans if they receive a lower interest rate or better terms.
If you have a piggyback mortgage, however, refinancing could pose a challenge. It’s often tricky to refinance a piggyback loan because both lenders have to approve. In addition, if your home has dropped in value, your lenders may even be less enticed to approve your refinance.
On the other hand, if you’re taking out a big enough loan to cover both mortgages, it may help your chances of approval.
Recommended: How Much Does It Cost to Refinance a Mortgage?
Is a Piggyback Mortgage a Good Option?
Not sure if a piggyback mortgage is the best option? It may be worth considering in the following scenarios:
If you have minimal down payment resources: Saving up for a down payment can take years, but a piggyback mortgage may mean the homebuyer can sign a contract years sooner than any other type of mortgage.
If you need more space for less cash: Piggyback loans often allow homeowners to buy larger, recently updated, or more ideally located homes than with a conventional mortgage loan. This advantage can make for a smart financial move if the home is expected to quickly build equity.
If your credit is a match: It’s traditionally more difficult to qualify for a piggyback loan than other types of mortgages. For many lenders, you will need to have your down payment, stable income and employment history, and acceptable DTI lined up.
Piggyback Mortgage Alternatives
A piggyback mortgage certainly isn’t the only type offered to hopeful homebuyers. There are other types of mortgage loans homebuyers may also want to consider.
Conventional or Fixed-Rate Mortgage
This type of loan typically still requires PMI if the down payment is less than 20% of the home’s purchase price, but it is the most common type of mortgage loan by far. They’re often preferred because of their consistent monthly principal and interest payments.
Conventional loans are available in various terms, though 15-year and 30-year options are among the most popular.
💡 Quick Tip: Your parents or grandparents probably got mortgages for 30 years. But these days, you can get them for 20, 15, or 10 years — and pay less interest over the life of the loan.
Adjustable-Rate Mortgage
Also known as an ARM, an adjustable-rate mortgage may help homebuyers save on interest rates over the life of their loan. However, the interest rate will only remain the same for a certain period of time, typically for one year up to just a few years.
After the initial term, rate adjustments reflect changes in the index (a benchmark interest rate) the lender uses and the margin (a number of percentage points) added by the lender.
Interest-Only Mortgage
For some homebuyers, an interest-only mortgage can provide a path to homeownership that other types of mortgages might not. During the first five years (some lenders allow up to 10 years), homeowners are only required to pay the interest portion of their monthly payments and put off paying the principal portion until their finances more easily allow for that.
FHA Loan
Guaranteed by the Federal Housing Administration, FHA loans include built-in mortgage insurance, which makes these loans less of a risk to the lender. So while it’s not possible to save on monthly insurance payments, homebuyers may still want to consider this type of loan due to the low down payment requirements.
Other Options to Consider
Some other alternatives to a piggyback mortgage might include:
• Speaking to a lender about PMI-free options
• Quickly paying down a loan balance until 20% of a home’s value is paid off and PMI is no longer required
• Refinancing (if a home’s value has significantly increased) and allowing the loan to fall under the percentage requirements for PMI
• Saving for a larger down payment and reducing the need for PMI
The Takeaway
Before signing on for a piggyback mortgage, it’s always recommended that a homebuyer fully understand all of their mortgage options. While a second mortgage might be the best option for one homebuyer, it could be the worst option for another. If a piggyback mortgage is selected, understanding its benefits and potential setbacks may help avoid financial surprises down the line. The home loan help center can help you make decisions.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.
FAQ
What is a piggyback fixed-rate second mortgage?
A piggyback fixed-rate second mortgage is a home equity loan or home equity line of credit (HELOC) that is obtained at the same time as the primary mortgage on a home purchase. Because its rate is fixed, the interest rate does not change over the life of the loan.
Is it hard to get a piggyback loan?
Because piggyback borrowers typically don’t pay for private mortgage insurance, the requirements to obtain this type of loan can be more strict. You may need a credit score of 680-700 or more and a debt-to-income ratio less than 36%.
What is the advantage of a piggyback loan?
A piggyback loan can help you avoid having to pay for private mortgage insurance (PMI) if you are making a low down payment on a home purchase. However, you’ll want to compare the costs of the second mortgage (including its closing costs) against the costs of PMI before making a decision.
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*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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