What Is a Piggyback Mortgage?
A piggyback mortgage is additional debt that can include any additional mortgage or loan beyond a borrower’s first mortgage loan, which is secured with the same collateral. Common types of piggyback mortgages include home equity loans and home equity lines of credit (HELOCs).
- A piggyback mortgage is any additional loan taken out on a property alongside a first mortgage.
- Examples include second mortgages, home equity loans, and HELOCs.
- Piggyback mortgages are used to help with covering down payments on a property or to avoid paying PMI.
Understanding Piggyback Mortgages
Piggyback mortgages can serve several purposes. Some piggyback mortgages are allowed to help a borrower with a down payment. Generally, most borrowers will only have the capacity to take on one or two piggyback mortgages since all of the loans are secured with the same collateral.
A piggyback mortgage can also be used to avoid having to pay for private mortgage insurance, or PMI. In this case, a second mortgage or home equity loan is taken out at the same time as the first mortgage. With an "80-10-10" piggyback mortgage, for example, 80% of the purchase price is covered by the first mortgage, 10% is covered by the second loan, and the final 10% is covered by your down payment. This lowers the loan-to-value (LTV) of the first mortgage to under 80%, eliminating the need for PMI. For example, if your new home costs $180,000, your first mortgage would be $144,000, the second mortgage would be $18,000, and your down payment would be $18,000.
Types of Piggyback Mortgages
Down Payment Mortgages
Down payment mortgages are a type of piggyback mortgage that gives a borrower funds for a down payment. Second mortgages are typically only allowed when they use funds from a down payment assistance program. All sources of down payment funds used in securing a mortgage are required to be disclosed to the first mortgage lender.
Generally, second mortgages from many alternative lenders are not allowed since they are beyond the parameters of the first mortgage’s terms and greatly increase the default risks for a borrower. Down payment assistant mortgages may also be known as silent second mortgages.
Generally, a borrower can only get a second mortgage using a subordinated piece of collateral when that collateral has home equity. Home equity is primarily a function of the value that a borrower has paid on their home. It is calculated as the home’s appraisal value minus the outstanding loan balance.
Many borrowers find themselves in an underwater mortgage in the early phases of a mortgage loan repayment since the property can decrease in value and the mortgage balance has not yet been substantially paid down. If a borrower does have home equity in their home, they have a couple of options for a second mortgage home equity loan.
These second mortgage products include either a standard home equity loan or a home equity line of credit. Both a home equity loan and a home equity line of credit are based on the available equity in a borrower’s collateral.
Home Equity Loans
A standard home equity loan is a non-revolving credit loan. In a standard home equity loan, a borrower can receive the equity value upfront as a lump sum principal payment. The loan will then typically require monthly installments based on credit terms customized by the lender. Borrowers use a home equity loan for various purposes including college costs for their child, home improvements, debt consolidation, or emergency capital expenses.
Home Equity Lines of Credit
A home equity line of credit is a revolving credit account that provides a borrower with greater spending flexibility. This type of credit account has a maximum credit limit based on the borrower’s home equity. The account balance is revolving which means borrowers control the outstanding balances based on their purchases and payments. A revolving account will also be assessed monthly interest which adds to the total outstanding balance.
In a home equity line of credit, borrowers receive a monthly statement detailing their transactions for the period and a monthly payment amount they must pay to keep their account in good standing.
How Can a Piggyback Mortgage Be Used to Eliminate PMI?
Private mortgage insurance (PMI) is often required by lenders if the down payment on the loan will be less than 20%. A piggyback mortgage can be used to come up with the down payment cash to eliminate this requirement in some cases. Note that there may be certain terms or restrictions on either loan that could prevent using them in this way.
Is a Piggyback Mortgage a Junior or Senior Loan?
A piggyback mortgage is a junior loan, subordinate to the primary mortgage, which is the senior loan. Junior mortgages will often come with higher interest rates and be restricted to lower loan amounts, and may be subject to additional imitations.
Is a Piggyback Mortgage a Combination Loan?
A combination loan is when the same lender issues more than one loan for the same purpose (such as buying a home). If the same lender issues both a primary mortgage and a HELOC as a piggyback mortgage, it would be a combo loan. If the HELOC were to come from a different lender, it would not.
The Bottom Line
A "piggyback" mortgage is an additional debt beyond the first mortgage loan. There are a variety of different types from a down payment mortgage to a second mortgage to a home equity loan to a HELOC. These loans can also be used to avoid paying a PMI through things like an "80-10-10" piggyback mortgage.