Looking to buy an investment property, but can’t afford a 20% down payment? Well, welcome to the party.
Thankfully, like Bruce Willis in Die Hard, we Millennials and Gen Z have some tools at our disposal to defeat the evil cash investors, get approved, and get the keys to our new home.
One such tool that’s making a comeback is the piggyback loan, which cuts your down payment in half (to 10%) and lets you pay off the other half over time, alongside your first mortgage.
What is a piggyback loan?
A piggyback loan is a second mortgage that you get at the same time as your first mortgage, hence the name.
Piggyback loans are designed to help homebuyers who can’t afford a 20% down payment avoid having to pay for expensive private mortgage insurance (PMI).
While your first mortgage will typically be a traditional mortgage, your piggyback loan, aka second mortgage, will likely come in the form of either a home equity loan or home equity line of credit (HELOC).
There are two common types of piggyback loans, and each has its pros and cons.
The 80-10-10 loan – for single-family homes and townhomes
The 80-10-10 is the classic piggyback loan structure right for most situations. As illustrated above, in an 80-10-10, you’ll get 80% of the home covered by your first mortgage, 10% covered by your piggyback loan, and you’ll pay the remaining 10% out of pocket.
The good ol’ 80-10-10 is a great fit for single-family homes and townhomes, but condos are another story.
The 75-15-10 loan – for condos
Unlike single-family homes and townhomes, condos typically require 25% down to qualify for the best mortgage rates. That’s because lenders, even at the federal level, consider condos to be riskier, with more factors outside of their control (HOA fees, maintenance, etc.).
Therefore, the 75-15-10 loan emerged to help prospective condo buyers hit that 25% down payment. The only major difference is the amount you’re paying off with your first versus second mortgages – you’ll still have to put down 10% cash.
Now that it’s pretty clear which piggyback loan is right for you, what do the qualification criteria look like?
How do piggyback loans work?
Let’s say you want to buy a $300,000 house, but you can’t afford a 20% down payment of $60,000. So, your lender requires you to get private mortgage insurance (you can learn all the ins and outs here).
PMI protects your lender, not you, by helping them recoup their costs in case you default on your mortgage during the first few years of your loan. You typically don’t have to pay PMI any longer once your loan-to-value ratio (LTV) hits 78%, i.e. you’ve paid off 22% of your home.
Now, the reason folks try their darndest to save 20% is because PMI sucks.
Now, you can save some money on PMI by paying it all upfront – so you’ll pay several thousands of dollars of PMI because you can’t afford tens of thousands of dollars of down payment – and none of that money goes into your home equity.
Like I said, PMI sucks.
Thankfully, piggyback loans emerged as a popular, 100% legal way to avoid having to pay for PMI.
Here’s a classic example of a piggyback loan (known as the 80-10-10 loan)
- Get a traditional mortgage to cover 80% of the cost of the home.
- Get a HELOC to cover 10%.
- Make a 10% down payment out of pocket.
- Avoid having to pay PMI, do a little dance.
To be clear, piggyback loans aren’t being “sneaky” or going behind your first lender’s back. In fact, many lenders are happy to underwrite your piggyback loan themselves, or at least refer you out to another lender specializing in piggybacks.
How can you apply for a piggyback loan?
The how is actually pretty straightforward – you’ll simply want to ask your first mortgage lender for suggestions on a second mortgage. Sometimes they’ll underwrite it themselves, and other times they’ll refer you out to multiple financial institutions to rate shop with. We don’t really curate a list of the best piggyback lenders because it all depends on where your first lender sends you.
If you’d like to explore your options for a piggyback before you commit to a first mortgage, you can simply ask your prospective lenders what their piggyback process looks like. Even better, if you’re able to connect with a loan officer, you can take a step back and ask if a piggyback is even your best option. That particular lender might have its own program that’s a better fit for your unique financial situation.
For a curated list of the best lenders with the lowest rates, check out our article: Best Mortgage Rates – Mortgage Rates Updated Daily.
Why would you get a piggyback loan?
Here are the three most common circumstances prospective home buyers consider a piggyback loan:
- You can’t afford a 20% down payment, and you want to avoid PMI.
- You’re looking to buy a new house before your old one sells.
- You’re considering a home whose value exceeds your local mortgage limits.
Chances are, if you’re reading Money Under 30, you fall into the first category: you can only afford a 10% down payment but don’t want to pay for PMI.
Will getting a piggyback loan save you money?
You’ll need to talk to your lender and do some math, because there are multiple money-saving options out there.
The chief advantage to piggyback loans is that they let you avoid PMI. However, piggyback loans still incur some costs of their own. It’s a second, tiny mortgage, after all, so you’ll be on the hook for:
- A second round of closing costs.
- A second monthly payment in addition to your first mortgage.
- Higher interest rates than your first mortgage.
For these reasons, a piggyback loan might not end up being your cheapest option.
FHA loans with PMI might still be cheaper than a piggyback loan
When you factor in the costs listed above, you might find that getting a Federal Housing Administration (FHA)-backed loan and paying for PMI actually ends up being cheaper overall.
That’s especially true if you qualify for one of your state’s housing assistance programs, which may offer down payment loan assistance or subsidized PMI.
In the end, you should definitely still consider both a piggyback loan and an FHA loan as cost-saving options.
Piggyback loans: pros and cons
Let’s recap the advantages and disadvantages of getting a piggyback loan:
- Save money on PMI. A piggyback loan helps you put 20% down so you can avoid paying thousands in private mortgage insurance.
- Make a lower down payment. By cutting your down payment in half, piggyback loans can help you to afford more house.
- Pay off piggyback loan anytime. Most lenders will let you pay off your piggyback loan anytime, leaving you with only a low, monthly mortgage.
- Steep requirements. Piggyback loans typically require a 700+ credit score and a debt-to-income ratio of 28%, meaning you’ll likely only qualify with excellent credit and high income.
- Double the closing costs and paperwork. When you apply for a piggyback loan, you’re essentially applying for a second mortgage and all that entails – double the paperwork, closing costs, and of course, another monthly bill (with higher interest than your first mortgage).
- Not always cheaper than a traditional mortgage plus PMI. You’ll want to do the math with your loan officer, because piggyback loans don’t always save money. You may get a better deal with an FHA-backed loan, state assistance, or even biting the bullet and paying for PMI.
In a competitive housing market, our generation can use every tip, tool, and strategy we can get. The piggyback loan is one such tool, helping eligible borrowers slash their down payment in half so you can get the keys to a new home faster.
You should consider a piggyback loan if you have consistent income, excellent credit, and can currently only afford 10% of a down payment on a house within your budget. Even then, it may not be your best money-saving option – you should also check out an FHA-backed loan and state- and lender-specific programs.