What is a Piggyback Loan?

Written by Banks Editorial Team
3 min. read
Written by Banks Editorial Team
3 min. read

Sponsored By

Are you buying a new home soon? You’ll likely have to make a hefty down payment and cover closing costs. Depending on the loan you select, you may also have to carry private mortgage insurance (PMI) unless you make a larger down payment or take out a piggyback loan. These loan products are also often used to help buyers steer clear of jumbo loans or get a lower interest rate when financing their home purchase. 

Access Your Home Equity

5c99f6b46b6a57000135380dLoading TrustPilot
Learn how Unison can help you leverage the equity in your home to unlock financial success without accumulating extra debt.
Learn how the Unison HomeOwner co-investment program can help you tap into your home’s equity to finance your lifestyle without added debt.

What is a Piggyback Mortgage Loan?

A piggyback mortgage is a type of loan that homebuyers take out in addition to their primary mortgage. It’s considered a second mortgage, which would be paid off after the primary mortgage if the borrower decided to sell the home. 

How Do Piggyback Loans Work?

Homeowners use these loans to avoid PMI, jumbo loans, or to secure a lower interest rate. The first mortgage covers 80 percent of the purchase price, and the second mortgage covers the other 20 percent, 15 percent or 10 percent. You’ll pay the remaining amount (if applicable) in cash as the down payment. 

Types of Piggyback Loans

There are three types of piggyback loans to choose from. 

80/10/10 Piggyback Loan

This is the most common type of piggyback loan. With an 80/10/10 loan, the first mortgage covers 80 percent of the purchase price and the second mortgage covers another 10 percent. The remaining 10 percent is taken care of by the buyer through a 10 percent cash-down payment. To illustrate, if you buy a home for $400,000, the first mortgage will cover $320,000. The second mortgage (or piggyback loan) will cover $40,000, and you’ll pay the remaining $40,000 out of pocket. Consequently, the total down payment on the home will be $80,000, which is 20 percent of the purchase price. 

80/15/5 Piggyback Loan

An 80/15/5 piggyback loan is ideal if you have less cash on hand to make a down payment. It works exactly like an 80/10/10 loan, but you’ll put 5 percent down out of pocket instead of 10 percent, bringing the down payment to 15 percent. 

80/20 Piggyback Loan

Suppose you don’t have money saved for a down payment; an 80/20 piggyback loan is a good fit. Your primary mortgage will cover 80 percent of the purchase price, and the second mortgage will cover the other 20 percent. So, you won’t have to come out of pocket for a down payment on the home. 

Access Your Home Equity

5c99f6b46b6a57000135380dLoading TrustPilot
Learn how Unison can help you leverage the equity in your home to unlock financial success without accumulating extra debt.
Learn how the Unison HomeOwner co-investment program can help you tap into your home’s equity to finance your lifestyle without added debt.

The Pros and Cons of Piggyback Loans

Piggyback loans have some key advantages, but there are also drawbacks to consider before deciding if they are a good fit for you. 

Pros of Piggyback Loans

  • You can avoid PMI. PMI helps the lender avoid financial damages if you default on your mortgage and is typically required if your down payment is under 20 percent. It’s relatively pricey and could add several hundreds of dollars to your mortgage payment, which makes taking out a piggyback loan a better option.
  • You can avoid having to take out a jumbo loan. If you’re planning to purchase a home that exceeds the conforming loan limit, you’ll have to take out a jumbo loan with a steep interest rate or fork over a hefty down payment. Or you can use a piggyback loan to help you cover some of the costs. For example, assume the conforming loan limit for conventional mortgages is $647,200 in your area. If the home you want to buy is $800,000, you’ll need a down payment of at least $152,800 ($800,000 – $647,200) to take out a conventional loan. But if you can get an 80/10/10 piggyback loan, you’ll only need to bring $80,000 to the closing table. 
  • You can buy a new home easily even if your other home hasn’t sold. It can be challenging to come up with a down payment for a new home if you still haven’t sold the one you’re currently in. But a piggyback loan can lend a helping hand, so you won’t have to miss out on the opportunity to get a good deal on your next home.

Cons of Piggyback Loans

  • You may have a higher interest rate on a piggyback loan. These loan products often come with higher interest rates, which means they can be costly over the life of the loan.
  • Your monthly payment on a piggyback could be steep. Piggyback loans also have shorter loan terms, so the monthly payment could stretch your budget thin. 
  • You’ll have to pay closing costs twice. When you finalize the transaction, you’ll have to pay closing costs on the first and second mortgage. 
  • You could have trouble refinancing your home. Some lenders may require you to pay off the piggyback loan if you decide to refinance your home later on down the road.

Alternatives to Piggyback Loans

If you decide the costs of these loan products outweigh the benefits, there are other options. First, you could always pay for PMI out of pocket or settle for a less expensive home. But suppose you’re unwilling to adjust your budget. In that case, you could apply for a jumbo mortgage and refinance into a conventional loan once the outstanding loan amount is low enough to qualify. 

Are you planning to use a piggyback loan to buy a second home without selling the one you currently live in? There’s also a viable alternative to make a down payment on a second home without incurring any additional debt. It’s called a co-investment, and it’s available through investors like Unison. They offer you cash now in exchange for a share in your home’s change in value when you decide to sell. 

You can unlock up to 17.5 percent of your home’s equity, and you’ll have up to 30 years to decide if you want to sell your home or buy out the agreement. Even better, there are no monthly payments, so you’re free to live life on your own terms. Throughout the agreement, you retain full ownership of your home, too. 

To learn more about Union and see how much equity you can unlock from your home, visit their website and start by entering your home address to get an instant estimate. It’s fast, easy and won’t impact your credit score.

Unison

You may also like

Want to purchase a second home but can’t afford the down payment? There are many ways to get the funds you need like Unison's co-investment.
Read more

Advertisement Disclosure

Product name, logo, brands, and other trademarks featured or referred to within Banks.com are the property of their respective trademark holders. This site may be compensated through third party advertisers. The offers that may appear on Banks.com’s website are from companies from which Banks.com may receive compensation. This compensation may influence the selection, appearance, and order of appearance of the offers listed on the website. However, this compensation also facilitates the provision by Banks.com of certain services to you at no charge. The website does not include all financial services companies or all of their available product and service offerings.