Piggyback Mortgages: The Low Down
Many lenders have increased their offering of low- and no-down payment mortgage options to assist home buyers. One of the latest additions is the “piggyback mortgage”. Piggyback mortgages, commonly called piggyback loans, became a popular option in the last decade. The fall in house prices from 2007-2010 saw a fall in the popularity of the piggyback loan, sometimes referred to as the ‘80/10/10’.
With home values steadily rising over the last 3 years, banks are now offering 80/10/10s again. This is part of an effort to increase the number of homeowners across the nation–particularly among homeowners who need to buy a house before the one they live in is sold off.
With a piggyback mortgage, you can get a loan with a down payment of just 10% and avoid having to pay the mortgage insurance payments that usually come with low- and no-down payment loans
Thinking of buying a house but can’t afford to put down 20%? The piggyback mortgage might be perfect for you.
How Does A Piggyback Loan Work?
A piggyback loan is essentially two separate mortgage loans. The first is a mortgage that covers most of the total borrowed amount, the second mortgage covers the remainder. This loan structure is called a ‘piggyback’ because the second loan is set up to “piggyback” on the first one, adding up to a mortgage size that is equal to the total amount being borrowed.
You can get a piggyback loan for up to 90% Loan-To-Value (LTV) on the total price of your house. The first loan will typically cover 80% of the price, while the second ‘piggyback’ loan covers another 10%, hence the name ‘80/10/10’.
The 80 in 80/10/10 represents the value of the first mortgage, the ‘10’ represents the second mortgage and the other ‘10’ represents the 10% down payment made by the home-buyer. In a standard piggyback mortgage, the 80 is set up as a fixed rate mortgage over a 30 year term and the 10 is usually a HELOC (Home Equity Line of Credit).
Another common arrangement for the piggyback loan is the 75/15/10. With this structure, the first loan covers 75% of the total purchase price, the second covers 15% of the total purchase price and the last 10% represents the 10% down payment made by the home-buyer.
The 75/15/10 is a popular choice for people looking to buy condominiums because mortgage rates for this type of home are often higher when the LTV of the first loan is more than 75%. In order to avoid those higher rates, condo buyers will reduce the size of the first loan to 75%. The other 15% is covered by the HELOC.
Other home buyers use piggyback loans when the price of the home they’re buying exceeds their local mortgage loan limit. Through the piggyback loan, they can borrow as much as $417,000 on their first loan, then borrow the remainder through the second loan.
For example, a home buyer in Kingwood, TX wants to put down 20% on a home that’s valued at $600,000. He may opt for a first mortgage of $417,000 and add a second, ‘piggybacked’ mortgage of $63,000 for a total of $480,000, which is 80% of the total price of the house.
There are several other situations like this where a piggyback loan is ideal.
You Don’t Have To Pay PMI With a Piggyback Loan
Because your first loan is capped at 80% LTV, piggyback loans might be a great way to pay a low down payment (10-15%) on a house without having to pay PMI. For a lot of home buyers, this is the main reason they choose the piggyback option.
To show you exactly how the piggyback mortgage works, imagine a home buyer in Houston who has good credit and would like to buy a home that costs $400,000 with a 10% down payment. Assuming that this buyer is not in the military and therefore wouldn’t qualify for a VA loan, here are a few mortgage options he can choose from:
- An FHA mortgage loan that allows for a 3.5% down payment
- The conventional 97 program that allows for a 3% down payment
- A Home-Ready loan that allows for a 3% down payment
- A conventional loan at 90% LTV
- An 80/10/10 piggyback mortgage loan
We can immediately rule out the Conventional 97 as the rates for a borrower making a down payment of just 3% are higher than for a borrower making a down-payment of 10%. The Conventional 97 is thus not the most ideal option for our buyer.
An FHA loan might not be the most suitable either, because, with a down payment of 10%, it’s usually cheaper to just use a conventional loan at 90% LTV. This leaves the buyer with the options of conventional financing, the HomeReady loan and the piggyback loan.
With conventional financing at 90% LTV, our buyer will have to pay monthly PMI fees on top of the higher rates he will be charged for putting down only 10%. Although PMI is a temporary charge, the higher rate isn’t.
To qualify for a Home-Ready loan, your house must be within certain areas; or, your income must be within specified limits. This too, isn’t ideal for our buy so the piggyback is a clear winner.
Our buyer can get a first mortgage loan of $320,000 and an additional piggyback loan of $40,000 to make the full $360,000.
Financial Safety and Future Planning
Piggyback mortgage loans also offer one huge advantage over single-loan programs — they are fantastic tools for financial planning. This can be attributed to the piggyback’s structure. Remember that the first loan is for up to 80% of the total price of the house and the second is usually a home equity line of credit (HELOC).
HELOCs work in almost the same way a credit card does, except that instead of starting out with a zero balance like you would with a credit card, you start “maxed out”. This means you have the capacity to borrow if you need to because you can pay off your HELOC at any time.
For instance, if you reduce your HELOC balance by $10,000 during its term, at any point in the future, you can easily write a check of $10,000 to yourself. At the end of the day, it’s your money. You can completely pay off your HELOC if you want and just keep it as an option in the future.
This is a trick that home-buyers who need to secure a new place before moving out of their current one use often. They purchase the house on an 80/10/10 loan and then use the funds from the sale of their house to pay off their HELOC. The safety net that 10% provides will come in handy in the event of any emergency or unexpected expense. Similar to a credit card, no interest is accrued if no money is borrowed, which makes the ‘open’ HELOC a fantastic tool for financial planning.
I strongly recommend that you click here to find out which mortgage loan programs you qualify for