What Is a Piggyback Mortgage?
A piggyback loan, often known as an “80/10/10 loan,” combines two different loans into one to pay for a single property purchase. A conventional mortgage, which generally covers 80% of the cost of the property, is the initial loan. The other loan is a 10% second mortgage, which is often a HELOC. Your down payment will pay for the last 10%.
Why would a buyer of a single property take out two loans? Since a piggyback mortgage only requires a 10% down payment from the borrower. As a result, you may benefit from cheaper rates and a lack of PMI without making any financial sacrifices.
The Process of a Piggyback Loan
To make it more affordable for you to purchase a property, a piggyback loan combines two different mortgages – a more extensive first mortgage and a smaller second mortgage. Your down payment is a portion of the second loan. You essentially put down 20% when you put down 10% in cash and take up a 10% second mortgage. As a result, interest rates decline, and private mortgage insurance is eliminated (PMI).
Due to its composition—the first mortgage for 80% of the home’s value, a second mortgage for 10% of the home’s value, and a 10% down payment—a piggyback loan is sometimes referred to as an “80/10/10 loan.”
What Makes a Piggyback Loan?
Your 80% conventional loan, the first component of a piggyback loan, operates similarly to any other primary mortgage. You would be eligible depending on your income, debt-to-income ratio, and credit score, and it would pay the bulk of the cost of buying the property. Most purchasers obtain a loan with a 30-year fixed rate.
A home equity line of credit is typically used for the second loan, which frequently covers 10% of the purchase price (HELOC). A HELOC is a “second mortgage,” which means it’s backed by the equity in your house and has a different monthly payment from your first mortgage.
Terms for HELOCs might change. Since the majority have variable interest rates, the loan rate and payment may fluctuate each month. HELOCs with an interest-only period for the first ten years are best used for short-term lending because they are more expensive overall.
Advantages of a Piggyback Loan
A piggyback loan resembles a traditional mortgage’s 20% down payment. Home buyers don’t have to put 20% down, but doing so has several advantages.
- Lower interest rates: Lenders may provide lower rates if you borrow no more than 80% of the house’s value.
- Private mortgage insurance is absent: Monthly private mortgage insurance costs are eliminated with a 20 percent down payment. If you put less than 20% down, PMI is necessary.
- Smaller loan size: Your primary mortgage will require less borrowing the more down payment you make. Some purchasers can keep under conforming loan limitations by taking 10% off the loan size, preventing them from needing a more expensive jumbo mortgage.
The monthly payment on your second mortgage must, of course, be considered. Even though you’d be paying less for your principal mortgage, the HELOC has costs that you won’t be able to avoid until you pay the loan off. Piggybacking is advantageous for borrowers who save more on the initial loan than they spend on the subsequent loan.
Example of a Piggyback Mortgage
Suppose you are purchasing a $400,000 house. You have enough money in your savings account, $40,000, to put 10% down. To pay the remaining $360,000, you’ll require a mortgage loan.
- Your monthly principal and interest payment on a 30-year, fixed-rate mortgage at 6.25% would be $2,275.
- Additionally, depending on a 1% of the loan amount private mortgage insurance (PMI) rate, you would pay monthly premiums of around $300.
- Let’s use a $500 monthly increase in property taxes and homeowners insurance as an example.
- Your total monthly mortgage payment under one loan would be $3,075
To equal your $40,000 cash down payment, if you utilized a piggyback loan to purchase the same $400,000 house, your second mortgage would contribute an additional $40,000. Your principal mortgage would then be reduced to $320,000.
- Your principal mortgage payment on a 6%, 30-year fixed-rate mortgage would be $1,970.
- Your HELOC would demand monthly payments of around $286 at 6% interest.
- No PMI is necessary because you make a 20% down payment.
- We continue to project that monthly property tax and insurance will cost $500.
- With a piggyback loan, your monthly mortgage payment would be roughly $2,756.
As you can see, merging two loans in this situation saved more than $300 a month. This was mainly due to the plan’s ability to avoid PMI fees and the reduced interest rate that comes with putting 20% down. The lower rate, which increases long-term savings, is permanent, whereas the PMI is temporary.
Piggyback Mortgage Requirements
You are technically applying for two loans at once when you apply for an 80/10/10 mortgage, so keep that in mind before being approved for the primary mortgage and a home equity line of credit (HELOC). Getting approved for a piggyback loan is a little more complex than being approved for a single mortgage.
For instance, if your credit score is 620, you can obtain a conventional loan for 80% of the home’s worth. However, you’ll probably need a credit score of 680–700 or better to be eligible for a HELOC.
Additionally, it would help if you had a debt-to-income ratio (DTI) that is no greater than 43%, which considers both monthly mortgage payments.
Finally, HELOC interest rates are greater than those of 30-year mortgages. Therefore, a strong application is essential to obtaining the lowest rate on both loans and minimizing borrowing costs.
Obtaining a Piggyback Loan
With a piggyback loan, you simultaneously apply for two different mortgages. Some lenders permit you to apply for both mortgages in one location. However, more frequently than not, borrowers choose to obtain their first mortgage from one lender and their second mortgage from a different one.
You don’t have to look for that second mortgage, which is good.
Most customers are seeking an 80/10/10 loan state their desire to their loan officer. Afterward, the loan officer might suggest a business to utilize for the second mortgage,
Which they will have already collaborated with. This will enable your “first mortgage” lender to shepherd both applications through at once, significantly streamlining the procedure.
Make sure your primary mortgage lender is aware of your intentions if you decide to go alone and obtain your second mortgage.
Piggyback Loan Types
A piggyback loan can be set up in one of two ways. The first type of loan, 80/10/10, is the most common. However, a 75/15/10 loan is an alternative. Instead of financing 80% of the home’s cost, the principal mortgage covers just 75%.
Some homebuyers utilize the 75/15/10 structure to finance a home that needs a larger down payment or to avoid acquiring a jumbo mortgage (like an investment property).
How to Avoid Using Jumbo Loans Through Piggybacking
A conforming loan, by definition, abides with the standards established by Freddie Mac and Fannie Mae. Conforming loans shall not exceed these organizations’ annual local lending caps. The conforming loan ceiling, for instance, is $647,200 in most of the United States in 2022.
A loan exceeding this limit will not be eligible for a conforming mortgage. Instead, the buyer would require a large loan. Jumbo loans can feature higher costs and stricter eligibility requirements.
Making a more significant down payment may occasionally allow a loan to fall back inside conforming lending restrictions. A piggyback mortgage is an alternative to a more substantial down payment if you lack the cash upfront.
An Illustration of Piggybacking Within Loan Parameters
For this example, let’s assume you have $85,000 in savings for a down payment on an $850,000 house. To pay for the remaining portion of the home’s cost, you’d require a mortgage of $765,000. That is more than the conforming loan ceiling for the majority of the United States; thus, a jumbo loan would be necessary in this case.
Try the 75/15/10 piggyback loan instead, shall we? Your down payment would increase by 5% under this option, or $42,500, bringing your total loan balance down to $637,500. That is roughly $10,000 below the 2022 conforming loan cap.
Thanks to the increase in your down payment provided by your second mortgage, you may now be eligible for a conventional loan.
Piggybacking for Condominiums Is 75/15/10
The 75/15/10 is frequently used to purchase condominiums. This is because condo mortgage rates are higher when the first mortgage loan-to-value ratio (LTV) is more than 75%.
To avoid incurring higher rates, condo buyers may cap the size of their first lien at 75% of the condo’s worth. After that, they put down 10%, with a HELOC covering the remaining 15%.
Planning Your Finances With Piggyback Loans
Compared to “one-loan” programs, piggyback loans have another clear advantage: they may be helpful in planning and securing one’s finances. That is a result of the piggyback loan’s design. A home equity line of credit (HELOC), which provides you with a handy borrowing option as a homeowner, is frequently the second loan in a piggyback.
HELOCs provide a lot of flexibility. Similar to credit cards, they let you borrow up to a specific credit limit, pay it back, and then borrow again. HELOC interest rates are also significantly lower than credit card interest rates. However, remember that a HELOC utilized as a component of a piggyback mortgage starts “maxed out” and that you will need to pay it down before you may re-borrow from the line.
You might write yourself a check for $10,000 against the HELOC later and use the money for whatever you choose, for instance, if you pay $10,000 to lower your HELOC debt. You may pay off your HELOC entirely and keep it available for future usage.
You must start making monthly payments to pay off any leftover debt after you can no longer take money from the HELOC, which usually happens after ten years.
Do Not Forget That Variable Rates Apply to HELOCs
Although most house loans are less flexible than HELOCs, sometimes this flexibility can be harmful.
For instance, the majority of HELOCs have varying interest rates. Therefore, depending on the state of the market, your rate and payment amount may differ from month to month. Your HELOC payment amount would increase if the Fed raised its benchmark rate.
A $40,000 HELOC would cost $268 per month at 6% interest; at 8% interest, it would cost roughly $335 per month.
The good news is that HELOC rates tend to be far lower than other variable-rate loans. They nevertheless provide lower borrowing costs than personal loans or credit cards.
A Piggyback Mortgage Refinance
Will I ever be able to refinance a piggyback loan? You may be wondering. Yes, however, it’s a little trickier to refinance with a second mortgage.
When you refinance, you can pay off the second mortgage. Combining two mortgage loans into one might lower your interest rate and the total amount of interest paid.
This won’t constitute a cash-out refinancing as long as you demonstrate that you used the entire second mortgage to buy your house. You can thus benefit from decreased prices. When you refinance, you will need enough home equity to pay off the second mortgage. Still, many homeowners are accumulating equity more quickly than anticipated due to the nation’s rapidly growing home values.
The second choice you have is to merely remortgage the principal mortgage, leaving the second lien (sometimes known as the “piggyback loan”) unaffected. It would be best if you collaborated with the lender who holds your second mortgage to do this. It must consent to trail your newly refinanced mortgage in second place. An “accord of subordination” is what this is.
In general, you should be allowed to renegotiate your piggyback loan at a reduced rate at a later date. However, be aware that there will be more hurdles to clear.