If you can’t afford a big down payment on a home and will have to pay private mortgage insurance (PMI) to qualify for a home loan, there’s one option that may work for you—a piggyback loan.
Also called a second mortgage, a piggyback loan closes concurrently with a first mortgage during a home-buying transaction. It can be used to extend financing terms, allow less money to be put down on a home, or break up a loan into two separate amounts to produce a better blended rate.
Getting to 80% Loan-to-Value
Having a loan-to-value (LTV) of 80 percent or lower on a first mortgage can help you get a lower interest rate. If your LTV is more than 80 percent—meaning you’re borrowing more than 80 percent of the purchase price—then you’ll have to pay private mortgage insurance.
After getting a first mortgage for 80 percent of the home’s cost, a borrower can get a piggyback loan for 10 percent or 20 percent, depending on their down payment.
For example, if a home’s purchase price is $100,000 and the borrower gets a first mortgage for $80,000, they can get a second mortgage for $10,000. They will then have to bring $10,000 in down payment money to the closing.
If they only had $10,000 for a down payment, then a $10,000 piggyback loan would help them avoid PMI. Otherwise, they’d have 90 percent LTV on the first mortgage, and would have to pay PMI.
A piggyback loan can also make up 20 percent of the home loan, meaning that with an 80 percent first mortgage, no down payment would be needed. In the above example of a $100,000 home, the $80,000 first mortgage would come with a $20,000 piggyback mortgage. No PMI would be needed.
Higher Interest Rates
Interest rates on second mortgages are usually higher than first mortgages, and can result in paying more interest and possibly extend the amount of time it takes to pay off the first mortgage.
While the monthly payment on a second mortgage will be fairly low compared to the first mortgage because of the smaller loan amount, the higher interest rate can make your loan payments higher over time. To avoid this, try paying off your second loan as soon as you can.
Second mortgages are offered in adjustable and fixed-rate options. Talk to your loan provider to determine which is best for you.