Piggyback Loans
The cost of a down payment prevents many qualified buyers from entering the housing market. This upfront expense often forces buyers to choose between two options: delay their purchase for years while saving or move forward with a smaller down payment and shoulder the burden of potentially costly private mortgage insurance (PMI).
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Fortunately, there’s another path. A piggyback loan can help buyers achieve homeownership sooner while avoiding the extra expense of mortgage insurance.
What Is a Piggyback Loan?
A piggyback loan is a creative financing strategy that combines two mortgages that close simultaneously when purchasing a home. The primary mortgage typically covers 80% of the home’s purchase price, while a second loan — or “piggyback mortgage” — covers a portion of the down payment.
This approach helps buyers who can’t make a full 20% down payment on a conventional loan avoid private mortgage insurance while still getting into their dream home.
Understanding how piggyback loans work is crucial when exploring options for a no PMI mortgage. These loans are popular among buyers in higher-priced housing markets where saving for a substantial down payment can take years.
Piggyback Loan Example
Let’s use the most common type of piggyback loan — the 80/10/10 loan — to break down how this loan structure works. Imagine you want to buy a $500,000 home. Instead of making a 20% down payment ($100,000), you could structure your financing like this with an 80/10/10 loan:
- First mortgage: $400,000 (80% of the purchase price)
- Second mortgage: $50,000 (10% of the purchase price)
- Down payment: $50,000 (10% of the purchase price)
This arrangement helps you avoid PMI, requiring only half the traditional down payment amount. The money you save on your down payment can be used for home improvements, emergency savings, or other financial goals.
Types of Piggyback Loans
When considering a piggyback loan, you’ll encounter several options for your second mortgage, which will be used to cover your down payment on the primary home loan. Each type comes with its own set of features:
- Home equity loans: A home equity loan gives borrowers a fixed amount as their second mortgage. This option offers predictable payments and works well for buyers who prefer stable monthly expenses. The mortgage rate stays the same throughout the loan term, making budgeting easier.
- Home equity lines of credit: A home equity line of credit (HELOC) lets you access the property’s tappable equity through a flexible credit line. You can draw from your line of credit as needed, potentially providing additional financial flexibility beyond your home purchase. Some buyers prefer a fixed-rate HELOC to combine the flexibility of a credit line with the predictability of fixed payments.
- Down payment mortgages: These loans are specifically designed to cover the gap between your available cash and the required down payment. Unlike HELOCs or home equity loans that can be used for various purposes, these second mortgages are structured solely to help with the down payment. They often come with competitive rates since their purpose is strictly limited to down payment assistance.
Piggyback Loan Structures
While the most common piggyback loan is the 80/10/10 loan, there are a few other options you might choose depending on your specific situation. The most popular arrangements are:
- 80/10/10: This loan structure allows you to take out a primary mortgage for 80% of the purchase price, a second loan for 10%, and make a 10% down payment. This setup helps you avoid PMI while keeping your down payment manageable.
- 80/15/5: This arrangement requires only a 5% down payment, with a second mortgage covering 15% of the purchase price. This option works well for buyers with less cash available for a down payment but strong credit and income.
- 80/20: The 80/20 mortgage loan structure eliminates the need for any down payment by combining an 80% first mortgage with a 20% second mortgage. While this option requires no down payment, it typically comes with higher rates on the second mortgage, which is one of the reasons it’s not very common today.
Ready to take the next step and become a homeowner? Understanding all available financing options can help you make the best choice. The Griffin Gold app provides a convenient way to explore different loan scenarios and find the perfect solution for your needs.
Pros and Cons of Piggyback Loans
Before deciding if a piggyback loan is right for you, consider its advantages and disadvantages. You should always carefully weigh these factors against your financial goals and circumstances. The key benefits to consider include:
- Lower initial cash requirements: Rather than saving up for a 20% down payment, you can purchase a home with significantly less money upfront. This allows you to purchase a home sooner while still avoiding the added expense of PMI that typically comes with lower down payments.
- Avoiding jumbo loans: By splitting your financing between two loans, you can often stay within conventional loan limits, even when buying a more expensive home. This typically means better interest rates on your primary mortgage and more flexible qualification requirements than you’d find with jumbo loans.
- Less money tied up in the house: Instead of putting down a large sum that gets locked into your home’s equity, you can keep more of your savings available for other investments, emergency funds, or home improvements.
Piggyback loans aren’t right for every home buyer, so it’s also important to keep these considerations in mind:
- Higher combined monthly payments: Managing two separate mortgages means you’ll have two monthly payments to track and maintain. This can result in a higher total monthly obligation compared to a single conventional mortgage with PMI.
- Potentially higher interest rates: Second mortgages typically come with higher interest rates than primary mortgages because they represent more risk to lenders. This means you’ll pay more in interest over time compared to other financing options.
- Additional closing costs: You’ll need to pay closing costs on both your first and second mortgages. These additional fees can add up to several thousand dollars more than you’d pay with a single mortgage transaction.
Explore Piggyback Mortgage Solutions
Breaking into the housing market isn’t easy, but you don’t have to put your homeownership dreams on hold just because of a down payment. Griffin Funding makes piggyback loans work for everyday home buyers just like you.
Ready to explore how a piggyback loan could work for you? Get in touch with Griffin Funding today.