Buying a home is a huge commitment, especially when you need to make a 20% down payment to avoid private mortgage insurance (PMI). One potential solution is a piggyback loan, a financing option that lets you split your home purchase into two loans.
Piggyback loans can reduce your upfront costs, help you bypass PMI, and even make higher-priced homes more accessible. However, they come with unique risks and considerations. In this guide, we’ll explain how piggyback loans work, their benefits and drawbacks, and when they make sense.
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What is a piggyback loan?
A piggyback loan is a structure where you take out two mortgages simultaneously to finance a home purchase. The first mortgage typically covers 80% of the home’s price, and the second loan—a home equity loan or line of credit (HELOC)—covers an additional portion, such as 10%. This leaves the borrower responsible for only a 10% down payment.
This structure is often referred to as an “80-10-10 loan,” though variations such as 80-15-5 loans also exist. Here’s how the numbers break down:
- 80: The percentage covered by the primary mortgage.
- 10: The percentage covered by the secondary loan (a home equity loan or HELOC).
- 10: The percentage you contribute as a down payment.
Piggyback loans help buyers reduce their upfront costs and avoid paying PMI, a requirement for most conventional loans with down payments under 20%.
How do piggyback loans work?
A piggyback loan involves two separate mortgages secured against the same property:
- Primary mortgage: This is your main mortgage, typically with a fixed interest rate and a long repayment term, such as 30 years.
- Secondary loan: This is either a home equity loan (fixed lump sum with predictable payments) or a HELOC (revolving credit line with variable payments).
For example, if you’re buying a $400,000 home, you could structure an 80-10-10 piggyback loan like this:
- $320,000 from the primary mortgage (80%)
- $40,000 from the secondary loan (10%)
- $40,000 down payment (10%)
To make the best decision for your home purchase, it can be helpful to weigh the pros and cons of a piggyback loan.
Pros of a piggyback loan
Reduces your down payment
A piggyback loan allows you to buy a home with a lower down payment while avoiding PMI.
Avoids PMI costs
PMI can cost thousands of dollars over the life of a loan. A piggyback loan eliminates this expense.
Provides flexibility for higher-priced homes
By combining two loans, you may be able to purchase a higher-priced home without exceeding your lender’s loan limits or needing a jumbo loan.
Potential tax benefits
Interest on the second mortgage may be tax-deductible, although this depends on IRS guidelines and your financial situation.
Best scenarios for a piggyback loan
Piggyback loans can be especially helpful when:
- You want to avoid PMI while keeping more cash in hand.
- The home you’re purchasing falls into the jumbo loan range, and you’d rather avoid higher rates and stricter requirements.
- You need to reduce upfront costs while maintaining savings for other priorities.
Cons of a piggyback loan
2 mortgage payments
You’ll need to manage two separate loan payments, which can complicate budgeting.
Higher interest on the second loan
The secondary loan often carries a higher interest rate than the primary mortgage, especially if it’s a HELOC with a variable rate.
Additional closing costs
Piggyback loans require separate closing costs for each loan, which can add up fast.
Negative equity risk
If home values drop, you could owe more than the property is worth, making it harder to refinance or sell.
Complicated refinancing
Refinancing two loans can be more complex than managing a single mortgage.
Example of a piggyback loan
Imagine you’re buying a $500,000 home and want to avoid PMI. You use an 80-10-10 piggyback loan, structured as:
- Primary mortgage: $400,000 (80%)
- Secondary loan: $50,000 (10%)
- Down payment: $50,000 (10%)
You calculate the costs with your lender:
| Expense | PMI for 7 years | Piggyback loan costs |
| PMI | $25,000 | N/A |
| Secondary loan interest | N/A | $10,000 |
| Closing costs for both loans | N/A | $7,000 |
| Total | $25,000 | $17,000 |
In this example, the piggyback loan saves you $8,000.
What lenders offer piggyback loans?
Here are a few lenders that offer piggyback loans:
| Lender | Loan type | Min. credit score |
| Gateway First Mortgage | Home equity loan | Not disclosed |
| Northstar Funding | Home equity loan | 700 |
| Black Rock Mortgage | HELOC | 680 |
| Direct Mortgage Loans | HELOC | Not disclosed |
FAQ
How difficult is it to qualify for a piggyback loan?
Qualifying for a piggyback loan usually requires:
- A credit score of 700+ (or higher for the best rates)
- A debt-to-income ratio below 28%
- Strong financials and savings to cover closing costs
Is a piggyback loan better than paying PMI?
It depends on the costs. While PMI is an ongoing expense, piggyback loans have upfront costs and potentially higher interest rates. Compare the total costs over time to determine the best option.
What are alternatives to piggyback loans?
Alternatives can include FHA loans with low down payments, VA loans for eligible veterans, and down payment assistance programs.