What is a piggyback loan?

In a nutshell

When buying a house with a mortgage, a piggyback loan is a second, smaller mortgage loan that helps you put money down on the house in order to avoid private mortgage insurance or other effects of not being able to put a full 20% down.

• The piggyback loan strategy helps you avoid private mortgage insurance or having to take out a jumbo mortgage.
• Generally, the piggyback loan is 10% of the cost of the house on the back of your 80% mortgage and a 10% down payment.

If you’re ready to pursue the dream of home ownership but sky-high interest rates and record-busting home values have left you short on cash for a down payment, a piggyback loan may be the key to fulfilling a lifelong dream.

How a piggyback loan works 

In a traditional home-buying scenario, it’s common for home buyers to have a 20% down payment to purchase a new home. For many reasons including the run-up of house prices over the last 15 years, the pathway to saving 20% is often long and arduous. For some people, it may seem impossible to reach. A piggyback loan, which is an additional mortgage or loan beyond a borrower’s first mortgage, can be used by some borrowers to obtain additional funds for a mortgage.

One type of piggyback loan is called an 80-10-10 piggyback mortgage. A second mortgage is taken out at the same time as the first mortgage: 80% of the home’s price is covered by the first mortgage, 10% is covered by the second loan — the piggyback loan — and the final 10% is supplied outright by the borrower (and serves as the down payment). 

For example, if your home costs $400,000, your first mortgage would be $320,000, the second mortgage would be $40,000, and your down payment would be $40,000.

Although a piggyback loan may sound appealing, there are also potential drawbacks, and borrowers should do their due diligence before proceeding. How does a piggyback loan work?

In the above example, the first mortgage is a fixed-rate loan for 80% of the home’s cost. For this loan, you’ll go through the same closing process as a traditional homebuyer. The second loan — the piggyback loan — is 10% of the home’s cost. (You’ll have to pay closing costs for this loan as well.) The last 10% of the home’s cost is the down payment, provided by the homebuyer.

By structuring the financing of a home in this way, borrowers can avoid purchasing private mortgage insurance (PMI), which is typically required when a down payment is less than 20% of the home’s purchase price. PMI is a type of mortgage insurance intended to help lenders recoup more of their money in case of a default. 

Piggyback loan types

A piggyback loan can serve different purposes. Sometimes piggyback loans are used to help buyers cover a down payment. They can also be used to avoid paying PMI. Here’s a look at several types of piggyback loans.

Home equity loan

A home equity loan is a type of loan that allows a borrower to tap into the equity of their home. Home equity refers to the amount of your home that you own; it is the difference between the value of your home and the outstanding mortgage balance. With a home equity loan, a borrower receives the equity value upfront as a lump sum payment. The loan is paid back in monthly installments based on the loan terms set by the lender.

Home equity line of credit (HELOC)

A home equity line of credit (HELOC) is similar to a home equity loan. It can be used in conjunction with a conventional mortgage to secure the purchase of a home, or as a revolving line of credit for repairs or upgrades to a home when a down payment isn’t needed.

Piggyback loan pros and cons

Piggyback loan alternatives

If a piggyback loan doesn’t meet your borrowing needs, there are some alternatives.

First-time homebuyer assistance programs 

Some first-time homeowners can take advantage of down payment assistance programs, though you may not have to have never owned a home before: Sometimes “first time” refers to a window of time, as in, you haven’t owned a home for the last five or ten years.

Your home state housing finance authority (HFA) will have resources on financial assistance, and the National Council of State Housing Agencies (NCSHA) has a helpful website that helps you find your state’s HFA. The Federal Housing and Urban Development agency also has a website devoted to this purpose. You may also have local housing assistance programs, especially if you live in larger metropolitan areas.

FHA loans

Backed by the federal government, a conventional Federal Housing Authority (FHA) loan requires as little as 3.5% down to qualified borrowers. Lenders that work with the FHA generally offer lower interest rates because the FHA guarantees the loan. Consumers with a score in the 500s may still qualify for an FHA loan but may have to make a larger down payment.

VA loan 

If you’ve served in the military or are on active duty, you may be able to qualify for a loan backed by the Department of Veterans Affairs. Additionally, a VA loan doesn’t require a borrower to have a down payment to get the loan.

Frequently asked questions (FAQs) 

Do banks still do piggyback loans?

Mortgage lenders still do piggyback loans and can often process both loans in-house. 

Can you do a piggyback mortgage on an FHA loan?

A piggyback loan is a way to buy or refinance a home using two mortgages at the same time. Some homebuyers use a piggyback mortgage to avoid paying private mortgage insurance, which is often required by lenders if the down payment on the loan is less than 20%. FHA loans generally only require a 3.5% down payment on the purchase price, so a piggyback mortgage is not typically necessary.

What is an 80-10-10 loan?

An 80-10-10 loan is one type of piggyback loan. With an 80-10-10 loan, you take out a primary mortgage for 80% of the home’s purchase price and a second mortgage for another 10%, while making a 10% down payment.