Piggyback Loans How they work
Piggyback Loans How they work

If you have a small down payment on your home, a piggyback loan can help you avoid some additional mortgage fees. However, these types of loans are not without their own costs and disadvantages. Here’s what you need to know.

What is a saddled loan?

A piggyback loan is a second mortgage—usually a home equity loan or line of credit, also known as a HELOC—that you can use alongside your mortgage.

Homebuyers use a piggyback loan to avoid paying for private mortgage insurance, which usually takes effect when your down payment is less than 20% of the home’s sale price. PMI acts as an insurance policy to protect lenders if you fall behind on your payments or fall behind entirely.

A piggyback mortgage agreement typically offers a primary mortgage equal to 80% of your home’s value, as well as a home equity product to cover the difference between your down payment and the remaining 20%.

The interest rate on a piggyback loan is usually higher than on a first mortgage, and the rate is variable, meaning it increases over time.

Piggyback lending became popular during the housing boom of the early to mid-2000s. For example, in 2006, about 30 percent of homebuyers in New York City used one, according to a 2007 report by the Furman Center at NYU.

The loan portfolio allows potential homeowners to buy the home they want and avoid PMI without paying 20% ​​or more in cash. But it also makes their homes more vulnerable to defaults.

When the national housing bubble burst in the late 2000s, homeowners with less equity were more likely to default than homeowners with a lot of equity.


Piggyback mortgages still exist, but are rare. “Popularity has waned, but lenders offering these secondary mortgages have also tightened considerably,” said Jeff Brown, industry director and mortgage lender at Axia Home Loans.

Even with the recent surge in house prices, they haven’t seen a big comeback. According to Ralph DiBugnara, CEO of digital real estate resource Home Qualified, “These demands have diminished with the expansion of mortgage products that require less than a 20% down payment and do not require a PMI.”

Types of piggyback loans

You can structure a piggyback mortgage in a number of ways. Here’s a breakdown of the different options based on your primary mortgage, piggyback, and down payment.

80/10/10 loan. This option is worth considering for traditional loans, which include a primary mortgage that covers 80% of the sale price, a piggyback loan facility that covers 10%, and a down payment that covers the remaining 10%.

80/15/5 loan. This option works like an 80-10-10 loan, but instead of depositing 10% and borrowing the remaining 10% through a piggyback loan, you simply deposit 5% and fund the remaining 15% with a second home loan .

75/15/10 loan. This option is available when buying a condo, which includes a 15% collateral loan and a 10% down payment. This is mainly because condo mortgage rates tend to be higher when the loan-to-value ratio is above 75%.

80/20 loan. The plan, popular in the years before the 2007 housing crisis, required no down payment at all. You just take out the primary mortgage to cover 80% of the sale price and pay the remaining 20% ​​with the secondary loan. However, this piggyback arrangement is no longer common.

The pros and cons of piggyback loans

When considering a piggyback mortgage, it’s important to understand the pros and cons.

Advantages of piggyback loans

It can save you money. PMI may cost you 0.3% to 1.5% of your loan amount each year. So, if your mortgage is $250,000, you could get PMI premiums of $750 to $3,750 per year. This equates to monthly payments of $62.50 to $312.50, plus the principal and interest you pay the lender and property taxes.

Depending on the cost of your second mortgage in monthly installments, you may end up paying less than PMI. But DiBugnara says both ways can be easily achieved. “Some secondary mortgages for piggyback loans have much higher rates,” he added. “In this case, the payment is likely to be higher than the PMI payment.” Be sure to do the math to find out which option is better for your situation.

You can deduct interest from both loans. The IRS allows you to deduct up to $750,000 in interest paid on qualified mortgages (or $375,000 if you’re married but filing a separate tax return). This includes home equity loans and HELOCs used to purchase, build, or substantially improve a home used as collateral.


Incorporating these savings into your calculation of whether a piggyback loan will save you money can complicate things. Also, unless you talk to a tax professional, it’s hard to know exactly how much you can save — or if it’s necessary to break down your deductions and claim mortgage interest deductions.

You can keep the HELOC for other purposes. A construction loan is an instalment loan, i.e. you receive the full loan amount in one lump sum and repay it in instalments. However, with a HELOC, you get a form of revolving credit during withdrawals that you can repay and borrow again over time to pay for renovations and other expenses.

Disadvantages of piggyback loans

Settlement costs may reduce value. In addition to closing fees for your first mortgage, you may also have to pay closing fees for your home loan or HELOC. However, some lenders offer home equity products with low or no closing costs. You should find out what the lender charges so you can factor it into your calculations.

Even if the closing costs are low, the bill may not work against you, and paying PMI may end up being cheaper than getting a second home loan.

This could make refinancing more difficult. If you took out a piggyback loan from a lender other than the one offering your first mortgage (which is the typical situation), it may be more convenient to refinance your home later to get paid or lower interest rates difficulty.

That’s because unless you take out a refinance loan large enough to pay off your second mortgage, both lenders must agree to refinance. Convincing two lenders can be difficult, especially if your home has fallen in value since you bought it.

Costs may increase over time. If the second loan you take out is an adjustable-rate HELOC, don’t just base your calculations on the current cost of each option.


Floating rates can fluctuate with market index interest rates. Since it’s impossible to predict how market interest rates will move, it’s impossible to know exactly how much a variable rate might cost you. If you’re on a tight budget and can’t handle increasing mortgage payments over time, an adjustable-rate piggyback loan might not be a good option.

How do you qualify for a piggyback loan?

Qualifying for a piggyback loan can be difficult because second mortgage lenders may have different eligibility requirements. While the specifics may vary from lender to lender, to get approved for both types of loans, you typically need the following:

  • Credibility. A FICO score of 620 or higher is usually required for a primary mortgage, but the minimum score for a secondary mortgage can be 680 or higher.
  • debt-to-income ratio. Mortgage lenders want to see a debt-to-income ratio of 43% or lower, and this includes primary and secondary home loans.

Note that lower down payments often translate into higher interest rates.

Piggyback Loan Alternatives

Look for loans without PMI. Some lenders offer traditional loans without PMI even if you don’t have a 20% down payment. Depending on the lender, this may be limited to first-time home buyers or low-income plans, or you may have to agree to a slightly higher rate.

As with piggybacking loans, double-check the numbers to make sure you’re not paying more than PMI over the long term.

Pay off your balance quickly. Traditional mortgage lenders typically add PMI to your loan when your loan-to-value ratio is greater than 80%, but ultimately your loan balance should be below that threshold. Lenders are required by law to automatically remove PMI once your LTV reaches 78% based on original loan and home value.

If you anticipate a major hit or cash flow to make additional payments, it can help you reduce your loan balance faster and get you to the point where you no longer need insurance.

If you’re struggling to pay off your balance and think your home’s value has gone up and you’re at or below 80%, you can get a home appraisal. If you are right, you can ask the lender to delete the PMI manually.

Wait until you have enough. While there are many ways to buy a home right now and avoid PMI, it’s best to wait until you have enough cash for a 20% down payment.

Saving the 20% needed to avoid PMI can take years. But if you think you can save money fast enough, it might be worth the wait.

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Jake Smith

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Jake Smith

He is the editor of Eragoncred. Previously, he was editor-in-chief of Eragoncred and a financial industry reporter. Jake has spent most of his career as a Digital Media journalist and has over 10 years of experience as a writer and editor.