Today’s housing market is competitive, with median home prices reaching $467,700 in the final quarter of 2022. Those prices might make you wonder how you’ll find the money for a 20% down payment and closing costs. Borrowers might consider a piggyback home loan in this situation.
A piggyback home equity loan consists of two simultaneous mortgages on the same property. It allows a lower down payment and avoids costly private mortgage insurance (PMI). The most recent data from 2022 reflects that piggyback loans only make up about 3% of mortgages.
If it’s such a terrific workaround to afford a higher-priced home on a limited down payment, why isn’t everyone doing it? It’s uncommon for several valid reasons. We researched why you should and shouldn’t consider a piggyback mortgage to buy a home.
In this guide:
- What is a piggyback home equity loan or HELOC?
- Pros and cons of a piggyback loan
- When it makes sense to use a piggyback HELOC or home equity loan
- What lenders offer a piggyback home equity loan or line of credit?
What is a piggyback home equity loan or HELOC?
A piggyback home equity loan goes by several names. You may even see other variations depending on your lender:
- “80-10-10 mortgage”
- “75-15-10 mortgage” (for condos)
- “Combination mortgage”
- “Simultaneous close seconds”
This mortgage structure splits your home purchase into two separate mortgages. The first mortgage is a standard primary mortgage with a fixed interest rate. It covers 80% of the home purchase.
The second mortgage is a home equity loan or line of credit (HELOC). It covers another 10% of the home purchase price by pulling from the home’s equity, so you only need a 10% down payment to buy the home.
Here’s a quick refresher on the differences between a home equity loan and a HELOC:
|Home equity loan||HELOC|
|One lump-sum payment|
Fixed interest rates are common
Payments stay the same
|Revolving credit line (similar to a credit card)|
Variable interest rates are common
Draw period of several years (10-year period is most common)
In many cases, new homeowners opt for a piggyback HELOC. The revolving credit line provides extra buying power after they pay down the balance. This could cover emergency repairs or home renovations as long as it’s within the draw period.
The variable interest rate and fluctuating payments of a HELOC are potential drawbacks. Do you prefer the stability of a fixed rate and predictable monthly payments? A home equity loan might be the better option, specifically during an increasing interest-rate environment. Another consideration is the type and frequency of income you make, such as steady salaried income versus unpredictable commission or self-employed income
When you ask your lender for a piggyback home equity loan, it may have no problem processing both loans in-house. It may suggest other lenders for the second mortgage if it doesn’t offer that loan structure. It’s not uncommon to have two lenders in this situation.
A piggyback loan appeals to borrowers for several reasons:
- Reduces your down payment, so you can afford more house for less
- Avoids the private mortgage insurance (PMI) requirement and saves money
- Bypasses lender home price limits for properties in the jumbo loan range
Piggyback loans can offer significant benefits. However, this form of home financing was popular during the housing boom and the resulting crash between 2001 and 2008. (More about this below.)
You may wonder about the differences between a home equity loan and a piggyback home equity loan.
Piggyback home equity loans are unique for several reasons:
- Higher credit and financial requirements.
- Borrow more than the average home equity loan-to-value (LTV) at 90%.
- Close on the piggyback loan at the same time as your primary mortgage.
- Piggyback HELOC credit line may be immediately maxed out to cover half of your down payment.
It’s often challenging to qualify for a piggyback home equity loan or HELOC, with many lenders requiring a credit score of at least 740 to qualify. You also must meet strict debt-to-income standards—often no more than 28%.
You’re only putting down 10% for the home purchase, so you’re borrowing more than most lenders allow on a home equity loan. The average LTV on a home equity loan is 85%.
When you choose a piggyback HELOC, you might max out the revolving credit line for the other 10% of your down payment. That drives up your credit utilization ratio and can damage your credit score.
Pros and cons of a piggyback loan
To make the best decision for your home purchase, it can be helpful to weigh the pros and cons of a piggyback loan.
- Reduces your down payment by half.
- Avoid paying for private mortgage insurance.
- Potential tax deductions for the second lien.
- Finance a higher-priced home with a lower down payment.
- Escape the restrictions of a jumbo loan.
- Manage two mortgage payments for the same property.
- The second loan may have a variable interest rate, so monthly payments could increase.
- Two sets of closing costs and paperwork.
- The second mortgage often has a higher interest rate than the first.
- If your property value decreases due to a volatile housing market, you risk having negative equity.
- In case of a layoff or other financial difficulties, you could be overleveraged in your home.
- Refinancing your mortgage is more complicated.
The disadvantages of piggyback loans are longer than the pros list. Let’s dig into it.
A glaring con is two sets of closing costs. If both loans close simultaneously, you only pay one set of closing costs, right? No: You’re responsible for the closing costs on both loans. That eats into your savings from eliminating the PMI.
You’re also likely to pay higher interest rates on your second loan because lenders see it as a riskier investment. A HELOC often means a variable interest rate, which could increase as interest rates change.
External factors can also affect this decision:
- Housing market conditions
- Financial difficulties
- The Federal Reserve’s decision to raise or lower interest rates
These factors culminated in the housing crash of 2008. Leading up to the crash, mortgage lenders authorized a significant number of piggyback loans. From 2004 to 2006, piggyback loans made up 22% of purchased home loans in the U.S.
Piggyback loans played a role because of their high LTVs. When home prices tanked, borrowers ended up in a negative equity position where their home was worth much less than they paid for it.
Layoffs and finance troubles intensified the situation as borrowers tried to keep up with mortgages they could no longer afford. Mortgage lenders have cut down on piggyback loans in recent years due to uncertainty in the housing market. Market volatility puts piggyback borrowers and lenders in a precarious spot.
When it makes sense to use a piggyback HELOC or home equity loan
It only makes sense to use a piggyback HELOC or home equity loan in certain situations. Consider your finances before making a decision here. Still, the following are scenarios where piggyback loans could be advantageous:
- You want to avoid PMI and would prefer to pay a lower down payment to maintain more liquidity.
- You want to buy a new home before your old home sells and need to finance part of the down payment.
- The home you want falls into the jumbo mortgage range, and you’d rather avoid the extra fees, higher rates, and higher qualifications.
If these sound like you, run the numbers to ensure it’s wise. Consider speaking with your financial advisor and asking your lender to help you compare the costs and benefits of each option. It’s helpful to ask for a cost breakdown of each loan option to see which works best.
Example of a piggyback home equity loan
To understand how a piggyback loan could be beneficial, let’s work with an example.
You want to buy a $400,000 house but can’t afford the 20% down payment—$80,000. You find a lender that offers piggyback loans. It offers 80-10-10 loans, so you’ll need a $40,000 down payment, and the other $40,000 is structured as a fixed-rate home equity loan.
You did the math with your lender:
- Your annual PMI would cost $3,000 for the next seven years ($21,000).
- Closing costs for both loans total $5,000.
- The total cost of borrowing for the second loan is $3,000.
|PMI over 7 years||Closing costs and borrowing costs of piggyback home equity loan|
In this case, if you can afford the home equity loan payments, the piggyback loan might make sense. You’d need a $40,000 down payment, your mortgage balance would be $320,000, and your home equity loan balance would be $40,000.
What lenders offer a piggyback home equity loan or line of credit?
Few mainstream lenders offer piggyback home equity loans. Below are four lenders we found that do.
|Mortgage lender||Home equity loan or HELOC?||Options (First mortgage–piggyback loan–down payment)||Minimum credit score|
|Gateway First Mortgage||Home equity loan: Fixed rate up to 20 years||80–10–10|
|Northstar Funding||Home equity loan||80–10–10|
|Direct Mortgage Loans||HELOC||80–15–5||Not disclosed|
See which lender offers the best rates and structure before making a decision.
How difficult is it to qualify for a piggyback HELOC or home equity loan?
Qualifying for a piggyback HELOC or home equity loan often requires:
- Excellent credit for the best rates (740 – 850)
- Debt-to-income ratio of 28% or less
- Solid financials that stand up to underwriting scrutiny
- Ample cash cushion
Without these requirements, you run the risk of getting a higher interest rate or being declined.
Is a piggyback loan better than paying PMI?
Like most other homeowners paying PMI, you may resent it. A piggyback loan has considerable risks, but it might seem reasonable to take risks rather than paying PMI—giving your lender more money.
Still, several factors can make piggyback loans more expensive than PMI:
- Loan closing costs
- Total interest on the second loan
If the costs of a piggyback loan outweigh the benefit of eliminating your PMI, consider less costly alternatives, such as Federal Housing Administration (FHA) loans, Veterans Affairs (VA) loans, down payment assistance programs, and no or low down payment loans.