Piggyback Loan: Can an 80-10-10 Loan Help You Save?
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Many homebuyers feel so intimidated by the idea of saving for a 20% down payment that they forgo it altogether and end up paying for private mortgage insurance (PMI).
If you’re determined to buy a mortgage but don’t have 20% to pay off, you might want to consider a piggyback loan.
A piggyback loan is essentially a second mortgage on your home and helps you avoid PMI by covering part of your down payment.
Here’s what you need to know about piggyback loans:
What is a piggyback loan?
With a piggyback loan – also known as an 80/10/10 loan – you basically get a smaller second mortgage to cover part of your down payment. This smaller mortgage is “on top” of the original mortgage to allow you to reach the amount you want to borrow.
This second mortgage is likely to be a Home equity line of credit (HELOC) with a 10 year drawdown period – but terms vary from lender to lender.
How a piggyback loan works
Piggyback loans are basically two mortgages plus a down payment.
The first digit of the loan represents your original mortgage, while the second digit represents your second “piggyback” mortgage. The third number is your deposit.
How 80/10/10 Loans Work
Although the 80/10/10 structure is the most common way to structure a piggyback loan, there are alternatives, and these percentages are not always the same.
With the 80/10/10 loan, here’s roughly what you can expect:
How 75/15/10 Loans Work
Another configuration of the piggyback loan is the 75/15/10 loan. A 75/15/10 loan is often used in condominium purchases because it may qualify you for a lower mortgage rate.
In general, condominium mortgages with a loan-to-value ratio (LTV) of over 75% have higher rates, which can cost more in the long run.
To verify: Credit score needed to get a home loan
Is a piggyback loan right for you?
A piggyback generally works best for borrowers who:
- You want a smaller down payment
- Do not wish to pay PMI
- You are buying a condo and looking for a lower interest rate
- I hope to avoid a jumbo loan
Before getting a piggyback loan, it is important to calculate the numbers. Make sure the cost of the piggyback loan does not exceed the cost of the PMI.
Keep in mind that you can eventually get rid of PMI, so that should be in your calculations.
While Credible does not offer piggyback loans, it can help you compare great mortgage rate and give you a better idea of what you can afford. In just a few minutes, you can see personalized and pre-qualified rates from all of our partner lenders. Checking prequalified rates is simple and secure, and it won’t affect your credit score.
Advantages and disadvantages of a piggyback loan
The main advantage of a piggyback loan is that it allows you to avoid PMI. While that might seem like enough reason to get one, there are a number of downsides to be aware of as well.
- You can save less money without paying PMI. Usually, when you invest less than 20% in a home, you have to pay for mortgage insurance. With the help of a piggyback loan, you can bring in less of your own money while avoiding paying the PMI.
- You can get a condo at a lower rate. Many lenders charge higher interest rates on purchases of condominiums with an LTV of 75% or more. If you get a piggyback loan, you might see a lower interest rate by keeping the LTV below 75%. This could potentially save you thousands of dollars in interest over the life of the loan.
- You can avoid getting a jumbo loan. If you want to buy a higher value home, you might need a jumbo loan. However, if you don’t want to deal with the requirements associated with qualifying for a jumbo loan, a piggyback loan can help. Since this reduces the amount you need to borrow, it could drop you below the jumbo loan threshold.
- They are more difficult to qualify. In many cases, it may be more difficult for you to qualify for a piggyback loan. Depending on the lender, you will likely need a credit score of at least 680, as well as a debt to income ratio. It is because you are qualify for a HELOC in addition to the original home loan – and doing it all at the same time.
- They are more complicated to refinance. You usually need to get permission from your HELOC lender to refinance a first mortgage. Therefore, you may need to pay off your piggyback loan before refinancing or try to find a situation where you can refinance both at the same time.
- You will have to pay the closing costs of two loans. Remember that a piggyback loan is a loan separate from your primary mortgage. Therefore, when you close your transaction, you must pay closing costs for both loans. This can increase the cost of your home purchase.
Although Credible does not offer piggyback loans, you can easily compare mortgage rates from our partner lenders without leaving our platform. Just enter some basic financial information in the table below and you will see several prequalified rates. Then choose the one that best suits your budget.
Low-down payment alternatives to piggyback loans
Borrowers who want to avoid a 20% down payment but do not want a piggyback loan have other reduced down payment options.
For example, an FHA loan has more flexible credit requirements and only requires 3.5% down payment. Fannie Mae and Freddie Mac also offer conventional mortgages with low down payment requirements.
|Type of loan||The description||Min. advance payment||Min. credit rating||DTI max.|
|FHA||Government insured mortgage loan for borrowers with low credit rating||3.5% or 10%
(depending on credit rating)
|580 with 3.5% decrease; 500 with 10% down||50%|
|Fannie Mae 97% LTV Standard||At least one borrower must be a first-time buyer||3%||620||50%|
|Fannie Mae HomeReady||For creditworthy, low-income borrowers||3%||620||50%1|
|Freddie Mac Home Possible||Very low, low and moderate income borrowers||3%||660||45%1|
|1Maximum income cannot exceed 80% of the region’s median income|
Before deciding on a piggyback loan, compare your options and determine what is probably the best mortgage for your situation.