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What is a piggyback loan, and when should you get one?
When you get a piggyback loan, you take out a second mortgage on top of the first one to finance the same home. This means you take out two mortgages at once to buy your house. Some home buyers use this method to avoid paying for private mortgage insurance or taking out a jumbo loan.
While piggyback loans can make homeownership more achievable, they’re not for everyone. Here's everything you need to know about piggyback loans, including eligibility requirements, how to use them, and pros and cons to consider before applying.
Learn more: The down payment needed to buy a home
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What is a piggyback loan?
A piggyback loan is precisely what it sounds like — you take out a second mortgage that piggybacks on the first one. In other words, you’ll use two mortgages to finance your home. The first one covers the bulk of the cost, typically 80%, and a smaller second loan — the piggyback loan — will supplement your down payment.
Sometimes, people take out a second mortgage to tap their home equity when they’ve lived in the house for a while. But with piggyback loans, you take out both mortgages at the same time (when you buy the home).
There are typically two scenarios when taking out a piggyback loan makes sense. First, you want to avoid private mortgage insurance (PMI) when you can’t afford 20% down on a home purchase. According to Freddie Mac, monthly premiums for PMI generally range from $30 to $70 for every $100,000 you borrow.
Second, you’re buying an expensive home that puts the amount you need to borrow over the conforming loan limit set by the Federal Housing Finance Agency (FHFA), which is $766,550 in most parts of the U.S. in 2024. By splitting your financing with a piggyback loan, you can keep your first mortgage within the conforming loan limits and avoid taking out a jumbo loan that usually comes with less favorable terms.
How do piggyback loans work?
The most common piggyback loan structure you’ll see is 80-10-10. Here’s how it works: You take out a primary mortgage (usually a conventional loan) that covers 80% of your home’s purchase price. You then take out a second mortgage that covers half of your 20% down payment, which is 10% of the sales price. You pay the remaining 10% down payment out of pocket.
Here’s an example to help you better understand what a piggyback loan looks like: Let’s say you’re buying a $500,000 home. Your primary mortgage would cover 80% of the purchase price, which is $400,000. The piggyback loan would cover $50,000 (10% of the home’s purchase price), and you’d pay the remaining 10% out of pocket to cover the remaining $50,000.
So, even though you’ve actually only put down 10% and are financing the other 10% with a piggyback mortgage, you still get to meet the 20% down payment requirement to avoid PMI and potentially secure lower mortgage rates.
Types of piggyback loans
Piggyback mortgages usually come in the form of home equity loans or home equity lines of credit (HELOCs).
Home equity loans
Home equity loans are lump-sum loans that use your home as collateral, allowing you to tap into the home equity you’ve built up. When used as a piggyback loan, the home equity loan helps cover a portion of the down payment for the primary mortgage. Home equity loans typically have fixed monthly mortgage payments and loan terms that range from five to 30 years.
Home equity lines of credit (HELOCs)
A HELOC is a revolving line of credit, similar to a credit card. This means you’re given a credit limit and can borrow against your home equity as often as you like up to the limit. You’ll open a HELOC at the same time you apply for a first mortgage so that you can use the funds from the HELOC to contribute toward your down payment. Unlike home equity loans, HELOCs usually have variable interest rates.
Dig deeper: Home equity loan vs. HELOC — Which should you choose?
Piggyback loan pros and cons
As with any type of mortgage loan, piggyback loans have advantages and drawbacks. Make sure to weigh them both carefully before signing on the dotted line.
Pros
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Lower out-of-pocket down payment. Since the piggyback loan covers a portion of your down payment amount, you don’t need to come up with as much cash up-front.
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No private mortgage insurance. With a piggyback loan, you can avoid PMI without coughing up a 20% down payment or searching for cheaper or smaller properties.
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Avoid jumbo loan interest rates. If you’re buying an expensive property and need a loan amount above the conforming loan limit, you’ll need to take out a jumbo loan, which sometimes comes with higher interest rates due to its risk. By taking out a piggyback loan, you can reduce the amount you borrow on your primary mortgage and avoid using a jumbo loan. However, jumbo loan rates might not be significantly higher than regular mortgage rates depending on your location and mortgage lender, so talk to a mortgage professional about rates before deciding what type of home loan you want.
Cons
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The second mortgage may have a higher interest rate. Since your primary mortgage has priority and is paid first in the event of default, lenders typically charge higher rates on second mortgages to offset the higher risk they’re taking on. The good news is that the higher rate would only apply to the amount you’re borrowing with the home equity loan or HELOC, not to the larger principal on the first mortgage.
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It can be harder to qualify for two loans. The requirements for a piggyback loan may be stricter since the lender is taking on more risk.
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You’ll pay two closing costs. You’ll need to pay closing costs on both the first mortgage and your piggyback loan, which can eat into any savings from avoiding PMI payments.
How to qualify for a piggyback loan
Since piggyback loans are riskier for lenders, qualifying for one can be trickier than getting approved for a first mortgage.
Most mortgage lenders will require a good credit score — usually 700 or higher — though the exact score depends on the lender you go with. Your debt-to-income ratio (DTI) is another factor lenders will consider when determining your eligibility. They typically like to see a DTI of 43% or lower, meaning all monthly debt payments, including both mortgages, must be 43% or less than your gross monthly income. But again, this requirement could vary by lender.
Because every mortgage lender has different eligibility requirements, you’ll want to shop around before applying. However, if your credit score and DTI are nowhere near these benchmarks, you might want to consider piggyback loan alternatives instead.
Read more: What credit score do you need to buy a house?
Piggyback loan alternatives
A piggyback loan isn’t the only option if you can’t afford a 20% down payment. Explore these alternatives before making a decision:
FHA loans
An FHA loan is a government-backed mortgage insured by the Federal Housing Administration and issued by a bank or other approved lender. FHA loans only require a 3.5% down payment if you have a credit score of 580 or more. If your credit score falls between 500 and 580, you’ll need to put 10% down. Just know that even though FHA mortgage loans don't require PMI, they do come with an upfront mortgage insurance premium and an annual MIP regardless of your down payment amount.
USDA loans
USDA loans are government-backed mortgages from the U.S. Department of Agriculture that help low- and moderate-income individuals buy homes in rural areas with no money down. USDA loans aren’t available to everybody, though. To qualify, you must meet income requirements and purchase a home in an eligible rural area.
VA loans
VA loans are another government-backed home loan offered by the U.S. Department of Veterans Affairs (VA) to help eligible military-affiliated borrowers and their families afford homeownership. VA loans typically don’t require a down payment since the VA insures the mortgage, which protects the lender if you default.
Conventional loan
The HomeReady program (backed by Fannie Mae) and the Home Possible loan (backed by Freddie Mac) are affordable conventional mortgage options with just 3% down. To qualify, you must meet the program requirements. For example, to be eligible for the Fannie Mae HomeReady program, your income must not exceed 80% of the area median income (AMI) where you intend to buy the home.
Piggyback home loan FAQs
Can you refinance a piggyback loan?
Yes. You can refinance a piggyback loan, whether it’s to get a lower interest rate and monthly mortgage payment, switch from an adjustable-rate loan to a fixed-rate one, or roll your second mortgage into your first mortgage. Most lenders will require you to have a good credit score and enough equity in your home to do so.
Is it hard to get a piggyback loan?
Getting a piggyback loan can be slightly more difficult than applying for a traditional mortgage since you’ll need to qualify for two loans at once. To make sure you’re financially stable enough to handle two monthly payments, lenders will typically want to see a high credit score and a low debt-to-income ratio. Fewer lenders tend to offer piggyback loans than other mortgage types as well.
What are the current piggyback mortgage rates?
Piggyback mortgages typically have higher interest rates than first mortgages because they’re second-lien loans. This means the lender has second dibs on collateral if the borrower defaults, making them riskier.
This article was edited by Laura Grace Tarpley.
